A few short months ago, few investors had heard the term metaverse. That all changed in October when social media behemoth Facebook Inc. announced it would change its name to Meta Platforms Inc FB-Q.
The corporate name change reflected company founder and chief executive officer Mark Zuckerberg’s belief that the fast-emerging virtual world will be the next great internet revolution. If anything, the ongoing pandemic has quickened that shift.
Meta Platforms, which also owns social media stalwarts Instagram and WhatsApp, has placed a multi-billion dollar bet on the metaverse, stating in its most recent quarterly earnings call that it would spend more than US$10-billion on applications and services for the virtual world.
For investors who share Mr. Zuckerberg’s belief that we will increasingly live virtually in 3D – think virtual 3D meetings, sporting events, and shopping – the question becomes how best to get exposure to this burgeoning sector without picking some losers among the eventual winners?
The easiest way to play the metaverse may simply be to buy an exchange-traded fund (ETF) that offers exposure to the technologies that are and will be used in various everyday applications such as private social interactions, education, business, and retail.
That approach will also likely lessen the investment risk that would be taken on if an investor were to bet on just a few celebrated tech names such as Meta Platforms and Microsoft Corp. MSFT-Q, for example.
“It’s kind of like marrying the internet with the kind of thing gamers have been familiar with the past decade,” says Yves Rebetez, an ETF analyst and partner of Credo Consulting Inc. in Oakville, Ont. “[The metaverse] will be popular because the tech companies that control the whole system are going to make it so.”
Canadian investment fund providers, keeping with their reputation for innovation, were fast out of the gate with the investment possibilities the virtual world offers. Two Toronto-based firms, Horizons ETFs Management (Canada) Inc. and Evolve Funds Group Inc., each introduced metaverse-focused ETFs that began trading on Nov. 29.
Yet, the two investment companies are taking different approaches in their respective funds.
Evolve Funds, which has carved a niche for itself with innovative ETFs, is relying on an active management strategy and will rebalance the companies it holds in the funds as needed. Horizons’ will use a passive approach instead.
Nevertheless, both companies have similar fees for their funds. Horizons Global Metaverse Index ETF MTAV-T has a management fee of 0.55 per cent and Evolve Metaverse ETF MESH-T charges a management fee of 0.60 per cent.
Raj Lala, Evolve’s president and CEO, says his firm initially planned on offering a passively managed ETF, but found that the metaverse indexes available did not fit with his firm’s vision of where the virtual world was headed. Many of those indexes included companies that may benefit from the metaverse while not being drivers of it, such as credit card providers.
“It’s early days and people still don’t have a clear definition of what the metaverse is, so let’s make this active and let’s make sure that we are picking companies that are really focused on the key areas of the metaverse,” he says.
Evolve expects to select between 25 and 50 companies for its fund with equal weightings. Today, it holds 25 stocks, each at a 4 per cent weighting. They’re a mix of household U.S. names such as Meta Platforms and Microsoft, entertainment outfits like Walt Disney Co. DIS-N, chipmakers including Intel Corp. INTC-Q, and emerging Asian companies such as Tencent Holdings Ltd TCEHY. The mix is 76 percent U.S. firms, 12 per cent from China, and 4 per cent from each of Japan, Singapore and Taiwan.
Mr. Lala says there’s a need for nimbleness when investing in this sector because there will be winners and losers as well as also sudden and massive bets similar to Facebook’s corporate pivot to the metaverse in October. A growing number of private companies focusing on the virtual world will end up going public as well when their services or products are successful.
In comparison, the Horizons ETF, which relies on the underlying Solactive Global Metaverse Index, casts a wider net and features a greater number of stocks.
Horizons’ approach to investing in the metaverse is concentrated on six sectors or industries: augmented/virtual reality, the creator economy of software and or social media companies, digital infrastructure, digital marketplace players, gaming, and digital payments.
“We had to figure out where are the key industries building these digital worlds and it comes down to these six pillars,” says Mark Noble, executive vice-president of ETF strategy with Horizons.
He notes that investors can get exposure to most of the metaverse-oriented stocks in the ETF by investing in the Nasdaq Composite Index, although exposure to Asian innovators is harder to get.
“This is a much bigger theme in Asia than it is in North America with companies like Tencent and Pinduoduo Inc. PDD-Q, which would not be as easily accessible,” he says. “Those are companies that are driving these themes forward in Asia.”
Asia, in general, has been quicker to embrace the possibilities of virtual and digital worlds, in large part, because there already was a strong acceptance of mobile-based technologies and payment, Mr. Noble adds.
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