BETZ - BETZ: Gambling ETF A Long Shot To Keep Up This Rally But Strong Odds Of Success Longer Term

2023-08-01 16:50:18 ET

Summary

• Roundhill Sports Betting & iGaming ETF (BETZ) has shown impressive recent performance, but it may be getting ahead of itself, along with its "risk-on" brethren.
• BETZ offers a solid long-term opportunity in the expanding global gaming industry, which is poised to capitalize on several favorable tailwinds.
• BETZ's smart portfolio construction only adds to this ETF's appeal.

We've see it in every fund ad for decades: "Past performance is not an indication of future returns." The mystifying thing is that so few investors actually follow that advice. In the case of Roundhill Sports Betting & iGaming ETF ( BETZ ), its recent performance is impressive. But that same case can be made for many parts of the stock market, especially in big tech, and more recently in what I'd refer to as "new growth industries," areas of the stock market that were not investable a couple of decades ago.

That was either because those industries did not have enough public companies to prompt a fund company to want to create a vehicle (casino and pari-mutual gaming companies like the ones BETZ invests in are an example of this). Or, they were industries that essentially didn't exist back then: Cloud computing and cybersecurity are two that come to mind.

These industries are new and exciting as compared to industrials and utility stocks. That tends to create investor excitement when the market is in an optimistic mood, as it has increasingly been this year. But history is littered with investors who bought the excitement and not the established, sustainable fundamentals, only to sell much lower when the proverbial dung hit the fan and the bubble popped.

BETZ: investing in an industry that's expanding globally

In the case of BETZ, I think there's a solid long-term opportunity in an industry that's broadening, innovating, and is getting more favorable legislative support. And, with only about $100 million in AUM after three years in business, BETZ is very much an under-the-radar name in the ETF industry. I believe that over time, more and more attention will be paid to the long-term emerging opportunity here.

The gaming industry is increasingly global in nature (which means cross-border merger activity which the industry has already seen and provides more liquidity and growth for companies that might not be able to go it alone long term). To be clear, BETZ does not invest in companies that make their money from video games, unless those games involve legalized gambling. So this is a separate industry from the firms who create video games that people play alone or with friends from a distance. There are several ETFs that target success in that industry.

We learn a lot about BETZ just by observing the name of the index ETF issuer RoundHill maps it to. It's the "Roundhill Sports Betting & iGaming Index." The latter part of that index name indicates that like many industries, this is one that is moving out of the brick and mortar and into the digital economy. I can attest to that, as one of tens of millions of people who bet on horse races from racetracks around the US, whenever they are racing live, and all in my iPhone. (For what its worth, I don't bet very much at all, so I think I have a clear-eyed view of the potential of this industry, and am fascinated by its long-term upside.)

Just be careful equating the recent 42% rally off the October, 2022 market lows with something particular to this emerging and expanding industry. As shown above, the Invesco QQQ Trust ( QQQ ) ETF essentially took the same path around the race course, so to speak. So, we have to separate the long-term differentiating qualities of the Sports Betting and iGaming industries from a Central Bank-driven, emotionally-charged monster rally off one of the worst years in the history of the stock and bond markets combined.

BETZ portfolio construction: lots to like

BETZ's portfolio is comprised of companies actively involved in sports books and gambling operating in person or online, as well as technology providers to those companies. The management committee that runs BETZ chooses stocks by dividing them into three groups: Pure-play, Core and Non-core. This is based on the nature of their operations or growth prospects towards sports betting. Pure-play securities are those which are heavily focused on sports betting, while non-core stocks which may have sports betting as a key driver in the future.

The Index is then weighed by tier, in which Core companies receive 1.5 of non-core stocks' initial weight, and pure-play stocks receives 1.5% of Core stock weights. So, for example, we might see a batch of 4.5% positions, some 3.0% positions and some 2.0% positions. BETZ is rebalanced and reconstituted quarterly.

Where have you gone, Pete Rose?

Bookies are being replaced by big, corporate online sports books that are expanding their jurisdictions. Professional sports leagues that used to shun any association with sports betting are now shoving it in front of us at every turn. Remember when baseball superstar Pete Rose, then a team manager, received a lifetime ban from the sport for betting on baseball? It has kept one of the best to ever play the game out of that sport's Hall of Fame.

Watch an NFL football game, and the point spreads and other "propositions" are everywhere. I think BETZ sits in an enviable long-term position in what could be a mega trend.

A great long-term outlook does necessarily mean much for current conditions. That said, BETZ is nearly 50% below its 2021 high, its stock portfolio sells at around 14x trailing 12-month earnings, and only 1.4x book value. It even kicks off a 2% dividend yield, a nice little bonus for a "growth" industry.

BETZ should benefit from its global diversification, once the rest of the stock market catches up to the US mega caps, which I believe will happen (but when, who knows?). Only 37% of BETZ is in US-based stocks, 47% is in European companies, and the remaining 16% is in stocks based in Asia. Nearly all of that is in Australian companies, as that country and neighboring New Zealand have very mature gaming industries.

Short-Term Hold, Long-Term Buy

However, that doesn't mean it is a screaming buy here for risk-conscious investors. Allow me to put it this way, after managing money professionally for 30 years: I have faith that the types of companies BETZ tends to own will continue to perform. I have little faith that the stock market will reward them consistently with higher prices.

The stock market is simply influenced by too many other factors these days. Big flows in and out of sectors and industries in rapid-fire fashion from hedge funds, high-frequency traders and the like.

The above chart shows the source of my hesitation to pound the table for all but the most patient investors. Say, those with an investment evaluation horizon of at least five years. In BETZ's short life span (about three years), it has already experienced a nearly 50% drop in six months, and a more than 80% rally in a similar time frame.

That's not the market trying to accurately price these stocks based on fundamental value! It's what markets do to nearly every industry and sector today: Toss the prices around, which makes us all pay more attention to the short-intermediate-term tactical nature of the stock market, driven by the factors I mentioned above that did not influence stock prices in the past the way they certainly do now.

Translation: BETZ is a Hold for me as a more tactical investor. I may alter my position size within my larger portfolio as a way to manage the inevitable market volatility. For those with five-year-plus evaluation horizons, do I think this can double in five years, back toward its old highs? I'd say that's at least a decent bet.

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