Domestic equity markets have been eerily quiet in the first half of 2015 despite the merger mania that saw more than 4,600 M&A deals worth $875 billion announced in the first five months of the year.
Even with the deal headlines involving industry heavyweights like Time Warner (TWX) and Mylan (MYL), May’s announcement by Pinnacle Entertainment (PNK) that it is in talks to sell itself to Gaming and Leisure Properties (GLPI) has breathed new life into a gambling sector still suffering the after effects of a correction in the second half of 2014. This new life may be a driving force behind the positive fund flows into ETFs in the Consumer Discretionary Sector where gaming resides (see “Turning the tide”).
And while there’s only one fund representing the entire sector, the Market Vectors Gaming ETF (BJK), we think investors looking for a quick and easy way to play the sector would do better to take their money to another table.
At first glance there’s a lot to love about the fund besides the smart ticker; while relatively small (less than $30 million in assets) BJK offers investors instant exposure to all facets of the global gambling market including casino operators, venerable racetracks and on-line gambling over who’ll be the next president. Passively managed, the funds benchmark is the Market Vectors Global Gaming Index, which, like most, is designed for maximum liquidity. It is cap-weighted, meaning the largest and most liquid stocks make up the bulk of the allocation. In the case of BJK, the top 15 make up more than 63%.
That focus on liquidity has given the fund both a strong casino focus and a strong international flavor. More than 75% of the allocation is invested outside the U.S. with the top slots in the portfolio taken by the Macau casino operators with Galaxy Entertainment Group (HKG) making up 9% and Sands China making up 7.5%.
For global macro traders, this broad allocation worked fine in 2012 and 2013 with the fund up more than 86% in exchange for liquidity. More active investors gave up a great deal of potential upside in 2012 and 2013 as the fund had nearly the same amount invested in Las Vegas Sands (LVS), which was up 94%, as it did in #1 holding Galaxy Entertainment, which was up more than 500% in the same period. In fact, while there were no consistent dogs in that two-year stretch, BJK underperformed both the Asian and domestic casino operators to which investors were so keen to gain exposure.
Fast forward to the casino stock crash in 2014 and the situation is reversed; thanks to the large allocation to Galaxy and Sands China, BJK is highly correlated to Macau’s monthly gambling revenue and underperformed domestic casino operations handily in 2014. With most major Macau casinos reporting declining gaming revenue (see One Cancels the Other, here) thanks to the on-going corruption cases by mainland authorities, that underperformance is likely to continue.
This year is shaping up to be a much better one for BJK, thanks to smaller allocations to domestic stocks like Pinnacle Entertainment and Churchill Downs (CHDN) that have helped the fund outperform domestic casino operators. Turning to the charts, the fund had found long-term support along prior resistance at $36. It finally cracked that support in late June and with BJK trading below its 10-, 20- and 50-week moving averages, not to mention strong overhead resistance between $38-$40, the most likely stopping point is close to a prior leg in the uptrend dating back to 2012 at $30. Given the potential payoffs, investors would be wise to fold and save their chips for another hand.