Creating a Video Game Market Index
Video Game market has grown continuously over the years, up to an estimated $180Bn in 2021.
Once deemed a small market, a sizeable valuation and 10–15% growth YoY is enough to generate interest of private funds : Venture Capitalists, banks and various investors. After an appalling year 2020 where people spent most of their time in lockdown, streaming and gaming have also largely outperformed the market, making those investors double-down on gaming sector, if only to diversify their portfolio and include pandemic-free digital assets.
The fascination of stocks
The explosion of online trading proves a certain fascination from public for financial markets. After a botched release, share price drop is the perfect story for journalists. But brownian moves of markets are endless and commenting them daily is of little value : 6 months after it’s #metoo reckoning, Ubisoft stock is higher than if ever was, because ultimately a company share price reflects a general consensus from the market, in the capacity of a public company to generate sustainable profits, and image risk has close to no-value on financial markets.
So we need to track sector as a whole. What does “outperforming the market” mean ? How is it measured ? How to invest on a sector growth without micro-managing specific stocks and loose 40% of your savings overnight ? That’s what index and ETF are for.
Index and ETF
“A market index is a hypothetical portfolio of investment holdings that represents a segment of the financial market, typically a selection of representative actors of a given industry. Investors follow different market indexes to gauge market movements.
An exchange traded fund (ETF) is a type of security that involves a collection of stocks that often tracks an underlying index.” (source : Investopedia)
ETF are an actionable instrument for investors to bet on an index. A few of them were created recently (2019, showing finance sphere still hasn’t caught-up) but there are imo several limitations :
- ETF include esport stocks. Esport industry is closer to sport industry, with a completely different business model, excepted for video game publishers, who capture most of the revenue. So, in a portfolio supposed to reflect video game industry, GFinity seems like an outlier.
- Weight of individual shares requires careful consideration. General practice is to weight each company with its market cap or its share price. This is good to reflect the global sector size evolution, but index will be driven by the biggest companies, crushing the variations of smaller companies under their market cap. Equal-weight ETF seem like a good solution, however they require frequent portfolio rebalancing (sell most expensive stocks and buy cheapest one) which, in the physical world, is simply impractical due to transaction fees.
Last but not least, ETF selections are privately owned, and ETF are heavily regulated. It means you can’t be flexible and “play around” with your portfolio, or add the latest IPO such as Unity in real-time. This is why making your own index is a great personal project, free of all constraints !
Video Game Index : C.H.O.I.C.E.S
My objective is to track the sector as a whole, while adressing the previous limitations :
- Removal of esport-centric stocks
- Trim the list of US companies, even though they are arguably the most powerful game builders as of 2020, to avoid building a “US video game index”, thus reinforcing their culture hegemony. As Peter Warman said in a conference of video game financing in Europe in december 2020, “more than half of new IPs are created in Europe, and then they thrive in US and Asia due to lack of financing”. As all choices, this one is subjective and tainted by my european nature : I accept that responsability.
- Have a well-balanced portfolio across Asia, US and Europe, as well a diverse representation of mobile/PC/Console and hardware/middleware and even game contractors companies such as Keywords, which has become one of the biggest studio in the world.
- Regarding weighting, I chose equal-weight to make sure Team17 stock is not less valuable than Take-Two. I could create an virtual ETF and theoretically rebalance the portfolio every day, free of transaction fees constraints, but I don’t really care about the value of a physical portfolio of shares : what I really want is to compute the average return of every stock, which is really what indexes are about.
- I want a limited selection of companies : a few dozens of the most widely known companies seem enough, so that we can get intimate with those companies and their brownian moves. For the companies that are listed on several exchanges, I generally chose the most liquid market or at the very least, the most convenient, data-wise.
All of this being taken into consideration, here is my selection.
K.I.S.S : Keep it simple and stupid.
On the technical side,
- Share price are snapshots of closing, using yfinance API which wraps yahoo finance.
- A python script is scheduled daily and retrieves the value of 30+ tickers, stores them and compute the relative return of every stock.
- The result is agregated in a tweet, pushed daily through twitter API.
Ideally, I’d like to provide a way to “slice” the index as desired : taking only the mobile sector, or PC/Console sector. I’d like also to plot the historical values captured for further analysis. And, at last, using the historical values by proposing various weight scenarios (by market-cap) would be fun too. But right now this is out of my technical reach.
If you’re interested in the project, feel free to suggest or challenge me on those choices ! The end result can be seen on twitter @vgindex.