ETFs have tried to offer investors exposure to the companies innovating in automated vehicles, robotics, the space economy and non-fungible tokens (NFTs) but is a basket aimed at a multi-sensory virtual world more science fiction hype than investing common sense?

Consulting a variety of sources online and within the ETF industry and one will likely come away without a clear understanding of what constitutes the ‘metaverse’. Definitions range from an umbrella of every part of online entertainment and life to virtually uploaded consciousness, however, the middle ground appears to settle around the metaverse being a virtual manifestation of physical reality.

Timo Pfeiffer, chief markets officer at Solactive, who have a range of indices targeting the theme, told ETF Steam the metaverse makes “any experience or space where you would like to be physically – online”.

Pfeiffer said this idea is not new and has been featured in pop culture for decades. What makes the COVID-19 era significant is its role in evolving the internet experience to subsume work and exercise with products such as Zoom and Peloton amongst others – the metaverse is the next step of this evolution, he said.

“Opening gifts at Christmas over video call with the grandparents is a great development but you cannot capture the environment or the smells, feelings and small noises to the extent to which we are expecting these things may one day be possible with the metaverse,” Pfeiffer added.

This kind of scene draws on virtual reality experiences already in the public eye, such as Facebook Oculus VR, Epic Games VR concerts, Sony offering virtual tours of the Etihad stadium for avatars and Disney patenting a virtual world simulator for its theme parks.

Undoubtedly though, videogames have been the home of the metaverse, as by design they transport users to a virtual world their characters can affect and be affected by, based on their actions. Furthermore, the advent of VR and haptic technology enable increasingly immersive world-building, where players’ interactions with the virtual environment require physical movements and elicit a growing range of multisensory responses.

The core thesis of metaverse proponents now is to take this idea of virtual reality and sensory immersion and move it beyond the world of play – and into social life, commerce and even business interactions.

ETFs enter the metaverse 

Though an industry – and concept – still under development, US issuer Roundhill decided to capitalise on the new wave of buzz surrounding the metaverse and launch the world’s first ETF addressing the theme, the Roundhill Ball Metaverse ETF (META).

Debuting at the end of June 2021, META tracks the Ball Metaverse index of 44 companies involved in computing, digital networks and data, immersive digital platforms, providers of standards of interoperability, payment processing, digital currencies and physical tech hardware and wearables.

Incidentally, the main tailwind for the theme followed later, in October, with the attention garnered by Facebook changing its name to Meta Platforms. Evidencing the importance of this decision from the world’s most valuable sociable media provider (by market cap), META may have returned a lacklustre -9% over the last month and -5.2% over the six months through 11 January, yet has claimed $906m in assets under management (AUM) in little over half a year.

With Facebook founder Mark Zuckerberg raising the attention given to the metaverse theme by an unknown multiple virtually overnight, it is now highly unlikely 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 US, ProShares, filed to launch its own metaverse ETF with the US Securities and Exchange Commission (SEC).

If approved, the ProShares Metaverse Theme ETF would track the Solactive Metaverse Theme index of 50 companies involved in a broadly similar range of segments to META’s ETF.

Notably, as well as capturing companies whose primary focus is on virtual world-building software and computing hardware, both ETFs have high allocations to some of the most recognised and often-appearing names in the tech industry.

How pure is the wrapped metaverse? 

Issuing a warning to investors hoping to get ETF exposure to burgeoning themes such as the metaverse, Todd Rosenbluth, head of ETF and mutual fund research at CFRA, said: “At this early stage the stocks of companies that might be a beneficiary of the metaverse are being driven by other parts of their business. For example, META owns Apple, Microsoft, NVIDIA and Qualcomm.

“Investors need to be aware that the ETF prospects are less connected to the long-term trend than if the fund owned just small-cap companies.”

Echoing these concerns, Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, added: “Maybe some of these tech names may have a place but there is a big advantage to being first in ETFs even if the theme is not in pure form yet (and I hope it develops).” 

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

“There is definitely a risk you just end up overpaying for a broad tech fund so looking at active share is important in these cases,” Psarofagis continued. 

Downplaying these concerns, Solactive’s Pfeiffer said given the size of the largest US tech players, they naturally cross multiple sectors with overlaps in the metaverse. 

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

“There are also going to be new players but overlap in ‘usual suspects’ is not a bad thing and index methodology means they tend to be capped and that is what we typically do.

“We would not exclude the FAANGs just for the sake of it because in an internet 2.0 or 3.0 – in a metaverse environment – they will be key forces as well.”

Pfeiffer also argued the metaverse means different things to different people and while the ProShares product replicates one Solactive metaverse index, the provider has a total of seven distinct metaverse benchmarks on offer targeting different sub-sectors, geographies and scales.

“Much like there is more than one metaverse index, there will be more than one metaverse ETF. By the middle of this year, I am convinced there will be a handful of metaverse ETFs,” Pfeiffer concluded.

Overall, many will remain sceptical of the metaverse theme’s prospects, let alone its ability to exist in an ETF that differentiates sufficiently from vanilla sector plays to justify the inevitably higher fees that are attached to more exotic, thematic plays.

Regardless, there will likely be more strategies addressing this theme – perhaps even in Europe – in 2022, with impressive early asset gathering illustrating investors still have appetite for speculative future industry plays.

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