Metaverse ETFs: the topic of 2022?

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ETFs have tried to give investors access to companies that are innovative in automated vehicles, robotics, space economics, and non-fungible tokens (NFTs), but a basket aimed at a multi-sensory virtual world is more science fiction hype than investing in common sense?

If you consult a variety of sources online and within the ETF industry, you are unlikely to have a clear understanding of what the “metaverse” is. Definitions range from a roof for every part of online entertainment and life to virtually uploaded consciousness, but the middle ground seems to center around the metaverse, which is a virtual manifestation of physical reality.

Timo Pfeiffer, Chief Markets Officer at Solactive, who has a number of indices on the subject, said ETF Steam The Metaverse does “any experience or space you physically want to be in – online”.

Pfeiffer said the idea isn’t new and has been used in pop culture for decades. What makes the COVID-19 era significant is its role in evolving the internet experience to subsume work and movement with products like Zoom and Peloton, among others – the Metaverse is the next step in that evolution, he said.

“Video calling grandparents opening gifts for Christmas is a great development, but you can’t capture the surroundings or the smells, feelings and small noises to the extent that we expect those things to be done with the Metaverse one day will be possible, ”added Pfeiffer.

This type of scene is based on virtual reality experiences already known to the public like Facebook Oculus VR, Epic Games VR concerts, Sony offers virtual tours of the Etihad Stadium for avatars and Disney has a virtual world simulator for patent its theme parks.

Undoubtedly, however, video games were the home of the metaverse as they inherently place users in a virtual world that affects their characters based on their actions and by which they can be influenced. In addition, the advent of VR and haptic technology enables increasingly immersive world-building, in which players’ interactions with the virtual environment require physical movement and evoke a growing range of multi-sensory responses.

Now, the core thesis of the Metaverse proponents is to carry this idea of ​​virtual reality and sensory immersion beyond the world of gaming into social life, commerce, and even business interactions.

ETFs are entering the metaverse

Although an industry – and a concept – is still developing, US issuer Roundhill decided to capitalize on the new wave of excitement surrounding the Metaverse and launch the world’s first ETF on the subject, Roundhill Ball Metaverse ETF (META).

META will be released at the end of June 2021 and tracks the Ball Metaverse Index of 44 companies active in the fields of computers, digital networks and data, immersive digital platforms, providers of standards for interoperability, payment processing, digital currencies and physical technical hardware and wearables.

Incidentally, the main tailwind for the topic followed later, in October, with the attention that Facebook attracted with its renaming to meta-platforms. As evidence of the importance of this decision by the world’s most valuable social media provider (by market capitalization), META may have a lackluster -9% last month and in the six months to the 11th in assets under management (AUM) in just over half a year .

With Facebook founder Mark Zuckerberg drawing the attention of an unknown multiple to the Metaverse issue practically overnight, it is now highly unlikely that the META product will be the last of its kind.

At the turn of the year, the issuer of the first Bitcoin ETF in the USA, ProShares, applied to the US Securities and Exchange Commission to introduce its own Metaverse ETF.

If approved, the ProShares Metaverse Theme ETF would map the Solactive Metaverse Theme Index of 50 companies that operate in a broadly similar area of ​​segments as the META ETF.

Notably, both ETFs capture not only companies that focus on software and computer hardware to build virtual worlds, but also high allocations in some of the best-known and most common names in technology.

How pure is the packaged Metaverse?

Todd Rosenbluth, Head of ETF and Investment Fund Research at CFRA, cautions investors hoping ETFs get exposure to emerging topics like the Metaverse, saying: “At this early stage, the stocks are of companies that could benefit from the Metaverse are driven by other parts of their business. For example, META owns Apple, Microsoft, NVIDIA, and Qualcomm.

“Investors need to be aware that the ETF outlook is less tied to the long-term trend than if the fund only owns small-cap companies.”

Addressing these concerns, Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, added: “Perhaps some of these tech names have a place, but being the first on ETFs is a huge benefit, even if the subject is not yet in its purest form (and I hope it evolves). ”

The same warning issued against META ETF also applies to the underlying index of the pending ProShares product, which weights almost 38% in FAANG stocks, Nvidia and Qualcomm.

“There is definitely a risk that you will end up paying too much for a broad technology fund, so it’s important to look at the active stake in these cases,” continued Psarofagis.

Solactive’s Pfeiffer downplayed those concerns, saying that given the size of the largest U.S. tech companies, they naturally cross multiple sectors with overlap in the metaverse.

“Big tech companies are best positioned to invest in these new segments and become leaders,” he added.

“There will be new players too, but overlap in ‘common suspects’ is not a bad thing and the index methodology means they tend to be limited and that’s what we usually do.

“We would not only exclude the FAANGs because in an Internet 2.0 or 3.0 – in a metaverse environment – they will also be key forces.”

Pfeiffer also argued that the Metaverse means different things to different people, and while the ProShares product replicates a Solative Metaverse Index, the provider offers a total of seven different Metaverse benchmarks that target different subsectors, regions, and scales.

“Just as there is more than one Metaverse Index, there will be more than one Metaverse ETF. I am convinced that there will be a handful of Metaverse ETFs by the middle of this year, ”concluded Pfeiffer.

Overall, many will be skeptical of the Metaverse theme’s prospects, let alone its ability to exist in an ETF that is sufficiently different from vanilla sector games to justify the inevitably higher fees associated with more exotic, themed games .

Regardless, there will likely be more strategies on the subject – perhaps even in Europe – in 2022, with the impressive early asset gathering showing that investors still have an appetite for speculative future industry games.

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