The Kentucky Derby Is Here. Want to Bet These ETFs Will Be Busy?

A trifecta of exchange-traded funds targets the legalized gambling industry.

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Reviewed by: Lisa Barr
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Edited by: Daria Solovieva

The racing world’s biggest event takes place at Louisville's iconic Churchill Downs racetrack this Saturday, May 6. Twenty horses are expected to compete for $3 million in prize money. But that figure pales in comparison to how much money will be bet on the race, which plays right into the hands of a group of exchange-traded funds that focus on the emerging industry of legalized betting. 

Last year, $179 million was bet at the Kentucky Derby. Last year, Rich Strike, an 80-1 shot, won the race, a reminder that, as in investing, there's always a chance. Horse racing has been legal to bet on in the U.S. since the 1920s. Fast-forward to today’s digital economy, and much of the betting is off-track, online, from our mobile phones.  

Sports betting has exploded in popularity. Whether it is the Super Bowl, the March Madness NCAA basketball tournament or regular season games in most sports, there's a good chance you can take a side and put money on it.   

This helped spur an increase in public companies devoted to sports betting, casinos and related businesses. ETF providers also jumped into the game, providing different ways to pursue that trend in a diversified package. Here are a few ETFs investors may consider if they are interested in gaining exposure to the business of legalized sports gambling. 

The VanEck Gaming ETF (BJK) is the longest-running fund in the group, dating back to 2008. This global ETF allocates more than half its assets to companies that reside outside the United States. BJK is a top-heavy ETF, as its 10 largest holdings account for nearly 60% of the fund. BJK has dramatically underperformed the S&P 500 index over its long tenure. However, this ETF’s trend may be changing, and not due to luck. Over the past 12 months, its 28% return is more than 10 times that of the S&P 500. Or, as they’d say at the Kentucky Derby this Saturday, 10-1. 

The Roundhill Sports Betting & iGaming ETF (BETZ) is the largest ETF in this small field, at only $135 million in assets. Like the horses in the Kentucky Derby, this BETZ is three years old. It is also a global fund, with 60% of its exposure outside the U.S. However, as opposed to BJK, BETZ’s largest non-U.S. allocation is to Europe (42%), not Asia. In part due to that difference, along with different mixes of holdings, BETZ has run ahead of BJK at some points in time, and behind it at others, as will be the case among the 20 thoroughbreds competing in Saturday’s one-and-a-quarter-mile gate-to-wire journey in Louisville. 

The B.A.D. ETF (BAD) classifies as a long shot in this peer group. This 18-month-old, $9 million ETF is intended for those who want it all, at least when it comes to so-called sin stocks. Gambling, alcohol and cannabis stocks make up its portfolio. According to the ETF’s website, BAD stands for balanced beliefs, agents of change and defined action. BAD is up 5.5% so far this year. 

All three of these ETFs stand for the accelerating growth in legalized betting. And all have at least a modest stake in the stock of Churchill Downs Inc., the company that owns the facility that will have the eyes of the sporting world on it this Saturday.  

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.