ETF players are doubling down on the online gambling and sports betting arena in 2021.
Betting interest has surged throughout the coronavirus pandemic, and a week after Super Bowl LV, related ETFs are enjoying a record run.
Right now, there are two primary funds out there that offer core exposure to gambling and sports betting – the Roundhill Sports Betting & iGaming (BETZ) and the VanEck Vectors Gaming ETF (BJK). Both have quickly raced to record highs.
BETZ, in particular, has skyrocketed 96% since it launched in early June.
VanEck's ETF offers a more traditional mix of casino stocks and gambling names – including Wynn Resorts and Las Vegas Sands – which have taken a hit from travel and leisure troubles. BETZ is a global pure play on digital gaming stocks like online bookmaker PointsBet, Canadian betting firm Score Media, and even a handful of SPACs focused on sports betting technology and data providers.
The BETZ fund has grown to accrue more than $350 million in total assets under management in just seven months and has seen inflows of $146 million so far this year.
Will Hershey, co-founder and CEO of Roundhill Investments, said the industry has been in hyper-growth mode ever since sports betting became legalized at the federal level in the U.S. in 2018 with the repeal of the Professional and Amateur Sports Protection Act of 1992 (PASPA).
It should come as no surprise that Super Bowl Sunday spurred on an extra dose of hefty betting activity. It's the single biggest betting day of the year for both Las Vegas sportsbooks and online betting shops — and for the world of ETFs, it's no different.
The numbers have started rolling in on a state-by-state basis, and current totals show $444 million in regulated wagers were placed on the big game with seven states left to report.
That's already smashing last year's total of $300 million and marks a record handle, or amount bet, on any single event. Analysts from PlayUSA expect the final tally to top $500 million in legal Super Bowl bets this year — and that's not including billions more pouring in via black markets and unregulated sports books.
U.S. sports betting revenue is forecast to reach $2.5 billion in 2021 and projected to grow to $8 billion by 2025.
What's driving the rapid expansion? Hershey cites the ubiquitous shift from brick-and-mortar services to mobile and online as well as a sweeping expansion of legalization across the country.
More and more states are coming online in terms of legal sports betting, such as Tennessee and Virginia, which took its first online sports bet in January.
"We expect as the U.S. market matures and more states come online, that's going to shift, and it's going to mean revenues for sports book operators," Hershey said on CNBC's "ETF Edge" last week. "But maybe more importantly, it's going to mean tax dollars for state legislators."
Sports betting has been legalized in some form or another in 21 U.S. states now, including New Jersey, Nevada and Pennsylvania, along with Washington, D.C. But some of the biggest states — California, Florida and Texas — have yet to follow suit.
Still, Hershey insists we're in the early innings of legalization and expects 10-12 more states will come online this year.
In Hershey's mind, it makes perfect sense for states to authorize sports betting to bridge the budget gap brought on by the pandemic and bring in additional tax revenue.
"I think really what's going on here, similar to what we're seeing in the cannabis industry, is there are material budget deficits at the state level, even at the country level," Hershey said. "We're really just getting started. When we look at the opportunity here for U.S. markets [alone], we're talking upwards of $20-$30 billion in terms of total addressable market for sports betting."
With the rapid rise of players like DraftKings and FanDuel, sports betting interest has evolved dramatically from daily fantasy sports to live betting – but Hershey believes the bulk of the real money is still going to be in online casinos, with sports books primarily driving customer acquisition.
Running a game of blackjack would still offer higher margins and much more predictable revenue than, say, this year's Super Bowl, where Tom Brady and the Tampa Bay Buccaneers defense stunned sports fans by handing the Kansas City Chiefs a blowout loss, 31-9.
"Who could have seen that coming?" Hershey said. "You have to manage for that as a sports book. Live betting technology is going to advance to the point where we're not even talking about the next 10 minutes, we're talking about whether the next pitch is a curve or a fastball. I think that's going to unlock real monetization opportunities when the technology gets to that point."
Some skeptics might dismiss the notion of partaking in online gambling operations or buying more pot to balance state budgets, but Dave Nadig, director of research at ETF Trends, said he sees the tax story as inevitable.
"Certainly, legalization of cannabis, a big part of that has been this push for tax revenue, at the state and local level," he said in the same "ETF Edge" interview. "I think we're going to see the same thing, frankly, in anything that we have previously regulated out as a 'sin activity,' like gambling."
Bottom line: When it comes to hot, buzzy themes tied to gamification trends, ETF investors are all in.
Disclosure: CNBC parent Comcast and NBC Sports are investors in FanDuel.