Are Analysts Right? Will Casino ETF Keep Winning?

It may seem like an odd pick on a day when consumer discretionary, high-beta and emerging markets stocks were all taken to the woodshed, but a buying opportunity could be nearing in the Market Vectors Gaming ETF (BJK).

First, some disclaimers. Yes, BJK finished with a loss of 1.8 percent Wednesday. And yes, that extends the ETF's losses over the past two weeks to 5.2 percent. Still, the ETF is up more than 13 percent year-to-date and that may imply investors that eyeballing BJK today are late to the party. Maybe not.

BJK offers investors that do not want to stock pick the best option for getting exposure to Macau, the world's largest gambling hub. Las Vegas Sands (LVS) sees Macau becoming a $100 billion market.

Nomura raised its 2017 revenue estimate for the only Chinese territory where gambling is legal to $70 billion from $13 billion, Barron's reported. In that note, Nomura boosted its price targets on Las Vegas, Wynn Resorts (WYNN) and MGM International (MGM).

Those U.S.-listed stocks combine for 19 percent of BJK's weight, but the Macau stocks of each represent another 12.4 percent of the ETF's weight. Those weights underscore the notion that BJK is an international ETF as the U.S. accounts for just 28.2 percent of the fund's weight.

In terms of exposure to Asian gambling growth, BJK has it. China, Australia, Malayisa, South Korea and Japan combine for over half the ETF's weight.

The international exposure comes with a rub that investors need to be aware of in an environment where the U.S. dollar is gaining strength: Currency exposure. As in BJK's currency exposure is more than two-thirds non-U.S. dollar. For example, the Hong Kong and Australian dollars, along with the euro and yen combine for roughly 40 percent of BJK's country weight.

Additionally, gambling is perhaps the ultimate display of discretionary spending, meaning BJK and its constituents need sanguine market environments and cooperative economic data to move higher. When that happens, which has for most of the past 12 months, BJK actually becomes a better idea than traditional discretionary ETFs. For example, BJK has outperformed the Consumer Discretionary Select Sector SPDR (XLY) by 500 basis points over the past year.

One last thought about BJK: The ETF has just $61.1 million in assets and although it has been proven dozens of times that an ETF's AUM total is not a valid predictor of returns, some so-called experts lead investors to believe that all sub-$100 million ETFs are evil and illiquid.

In the case of BJK, the ETF rarely trades outside of a half percent premium or discount to its net asset value, according to issuer data, indicating this is not an illiquid ETF. More importantly, as BJK's one-year performance compared to XLY shows, ignoring small ETFs just because they are small is a costly idea.

BY The ETF Professor