These Gambling ETFs Are Poised for Growth in a Postpandemic Era

December 07, 2022

Over the past years, legalized gaming has drained some profits from Nevada casinos.  

In the U.S., gambling is now legal in 48 states, with a 100% ban in place only in Utah and Hawaii. Outside the U.S., Macau has become a gaming mecca in Asia, attracting many gamblers from mainland China, where wealth has grown exponentially.  

Technological advances have also made wagering easy, with a plethora of apps available on mobile phones. Many companies now operate as bookies, bringing online gaming to the public. 

Still, casinos continue to flourish in the postpandemic era. In October 2022, the Nevada gambling industry experienced more than $1 billion in revenue for the 20th consecutive month and other companies stand to benefit from softening of COVID-19 rules and increasing opportunities to gamble online.    

BETZ Focuses on Online Gambling 

The Roundhill Sports Betting and iGaming ETF (BETZ), which holds a portfolio of online gaming companies, is a fund that’s worth watching as online gambling market continues to grow.  

The top holdings of BETZ include: 

 

Source: ETF.com 

 

The above chart highlights that BETZ includes a 10.13% exposure to the two high-profile internet sports betting companies, PENN Entertainment and DraftKings. At $15.87 per share on Dec. 5, BETZ had $115.44 million in assets under management and traded an average of 37,238 shares daily. BETZ charges a 0.75% management fee.  

BETZ closed at $24.83 on Dec. 31, 2021 and was 36.1% lower on Dec. 5. 

Problem Facing Online Gaming 

While many market participants had high hopes for online sports betting and gaming, the performance did not meet expectations. Companies like PENN, DraftKings and others have paid huge acquisition fees for customers, offering incentives for new accounts. 

Profitability has remained elusive. PENN closed 2021 at $51.85, and at $34.25 on Dec. 5, the shares fell 33.94%. PENN reached a record high at $142 in March 2021 and fell 75.9% from the peak.  

Meanwhile, DKNG did worse, closing at $27.47 at the end of 2021 after trading to a high of $74.38 per share in March 2021. At $14.87, DKNG was 45.9% lower in 2022 and 80% below its record peak.  

Jim Chanos, one of the most successful short sellers, has cashed in on his short-side wager on DKNG, calling the company’s marketing spending “insane.” 

BJK Is a Diversified Gambling ETF 

The VanEck Gaming ETF (BJK) portfolio includes online gaming, casinos, casino resorts and related businesses. 

The top holdings of BJK include: 

 

Source: ETF.com 

 

BJK has a 15.56% exposure to three of Macau’s top casino owners: Las Vegas Sands, MGM Resorts and Caesars Entertainment. BJK’s exposure to DKNG and PENN is 5.15%, half the level of the BETZ ETF.  

At $40.80 per share on Dec. 5, BJK was 8.2% lower than the $44.45 Dec. 31, 2021 closing price. BJK has far outperformed BETZ in 2022.

Recent events in China suggest the government will ease its COVID-19 lockdowns. As China emerges from years of lockdowns, the pent-up demand for travel and journeys to Macau stand to turbocharge profits at casinos. 

 

Source: Statista 

 

The above chart highlights the revenue nosedive caused by the pandemic. If revenues return to pre-COVID levels, casino operators will cash in, leading to profits for the leaders like Las Vegas Sands, Ceasars Entertainment, MGM and others.  

BJK stands to continue to outperform BETZ and could soar in 2023.  

M&A on the Horizon 

We could see M&A activity as the companies in BJK could swallow those in BETZ for pennies on the dollar. 

We may see the leading casino operators scoop up these companies with know-how and vast customer lists for pennies on the dollar. Some companies will benefit from the vast expenditures PENN Entertainment, DraftKings and other online sports betting and iGaming companies made over the past years. 

Accretive mergers may only turbocharge future profits for the leaders and stand to boost BJK. Chanos never said he disliked the gambling business; his objections that led to a massive DraftKings short position were on the marketing spend.  

The author Hunter S. Thompson was also a gambler who looked for the best odds.  

“There is a definite, perverse kind of pleasure in beating the ‘smart money’ in sports, politics, or anything else, and the formula for doing it seems dangerously simple: Take the highest odds you can get against the conventional wisdom, but never bet against your own instinct or the prevailing karma,” he wrote in an article on the 1974 Super Bowl in Rolling Stone. 

With the end of China’s lockdowns on the horizon, the prevailing karma favors BJK.  

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