Global Gaming ETF Sticks To Knitting

January 24, 2008

Van Eck launches pure-play with exposure to China and other booming markets.


Trouble in tinsel town with an ongoing writers' strike and a slowdown in global economic fortunes aren't stopping the release of another exchange-traded fund (ETF) willing to roll its dice on a once-hot part of the entertainment industry. 

Van Eck Global's Market Vectors-Gaming ETF (AMEX: BJK) is launching just as the sector tanks. Its older rival, PowerShares Dynamic Leisure & Entertainment (AMEX: PEJ) is down more than 9% this year. That follows an 8.7% loss in 2007.

Another competitor in gaming, FocusShares ISE Sindex (NYSE: PUF), has been doing even worse this year.

"These companies have been hit hard this year. But we feel there's a compelling long-term growth theme in gaming," said Van Eck's Adam Phillips.

Until about six months ago, the industry was booming, points out Tom Lydon. The Newport Beach, Calif.-based advisor says even with labor strife in entertainment sectors and slumping consumer activity in some industries, Las Vegas and many top gaming locations are still thriving.

"Super Bowl weekend's coming up, and Las Vegas is still pulling in a lot of bodies," Lydon said. "Top gaming resorts are also huge draws as destinations for conventions. So from a gaming standpoint, there really isn't any evidence yet that the recent correction in the market is impacting Vegas or the big players."

The PowerShares ETF's broader-based than either of the other two, Lydon says. It has about 76% of its assets in consumer services and 18% in media. Another 5% is invested in consumer goods.

By comparison, PUF's closer to a pure-play on owners and operators of casinos, Lydon says. But it also holds some beer and alcohol companies as well as cigarettes and tobacco makers.

"The purest play, though, is the new Van Eck ETF," Lydon added.

The question comes down to how much concentration you want in such a niche industry, he says. "Las Vegas will tell you that people will spend money to entertain themselves in good times and bad," Lydon said. "But after 9/11 in 2001, growth clearly slowed in gaming."

Although BJK's all-gaming, its index breaks those companies into five different areas. The biggest at 38.8% are casinos and related resorts. Some prominent names in that category are MGM Mirage (NYSE: MGM) and Wynn Resorts (NDAQ: WYNN).

The next biggest area is tech at about 31%. The largest stock in that category, International Game Technology (NYSE: IGT), held about 10% of the portfolio's total assets. It also represented the fund's largest single holding.

Sports and race books held 22% of the index's total assets. The biggest name in that group was U.K.-based Ladbrokes (LSE: LAD.L).

Other segments in the fund are horse racing and online gaming.

Perhaps most compelling could be the ETF's exposure to exploding gaming destinations overseas.

"It's a pure-play gaming ETF with a global scope. And by pure-play I mean that the companies must derive at least 50% of their total revenues from activities related directly to gaming," said Van Eck's Phillips.

The U.S. accounts for 43% of the underlying S-Network Global Gaming Index. It holds some 69 names with a large-cap (52% of assets) tilt. Another 38% is invested in mid-caps with the rest going to small-caps.

"More than 150 countries now participate in some form of legal gambling," Phillips said. "And obviously, Macau in China is the big draw from a global perspective. It last year surpassed Las Vegas as the leading gaming center in the world."

The ETF's other major geographic breakdowns include: Australia (15%), Malaysia (9%) and the U.K. (8.5%). China represents less than 1%. "A lot of the operators in Macau are foreign companies," Phillips said.

The benchmark is modified market-cap float adjusted. "It's ranked by market-cap size and then adjusted by shares outstanding," said Phillips.

The expense ratio for BJK listed at 0.65%, which is in line with its two closest rivals.


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