New ETFs offer investors a chance to bet on the metaverse

This next iteration of the internet is an immersive 3-D virtual world where people use virtual and augmented reality to socialize, work and play. McKinsey & Co. estimates that this market could grow to $5 trillion in annual revenue by 2030. Venture capitalists have plowed $120 billion into metaverse technology and infrastructure during the first five months of 2022, McKinsey says, more than double the $57 billion invested in all of 2021.

But trying to predict which stocks will be winners and losers in this amorphous tech universe can be difficult for the average investor. Adding to the complexity is that many companies that promote themselves as metaverse stocks aren’t necessarily investing large sums in the emerging technology the way Facebook parent Meta Platforms Inc., Snap Inc. and Nvidia Corp. are.

In response, fund companies such as Fidelity Investments, ProShares and Horizons ETFs have launched metaverse ETFs. These thematic funds enable investors to gain exposure in the metaverse through an index composed of a basket of stocks, or through active management.

“We are in the midst of a multitrillion-dollar technological transformation that will unfold over the coming decades," says Matthew Ball, a venture capitalist and CEO of Metaverse Research Partners, which created the index behind the first metaverse ETF, Roundhill Ball Metaverse ETF (METV), which launched in June 2021.

Today, there are seven metaverse ETFs with total assets of $438.2 million, Morningstar Direct reports. Besides METV—which has the lion’s share of the market, with $411.5 million in assets as of Sept. 30—others include Fidelity Metaverse ETF (FMET), which launched in April 2022 and has $10.9 million in assets, and ProShares Metaverse ETF (VERS), which launched in March and has assets of $5.66 million.

“What’s driving interest among individual investors is the fact that people are now engaging in the metaverse through gaming and in other areas of their lives," says Simeon Hyman, global investment strategist at ProShares. “They are experiencing it firsthand and are imagining a connected metaverse with exponential growth opportunities. They envision a virtual world where your presence can go anywhere—from a virtual game to a virtual concert to a virtual mall."

Beware the hype

Still, investors who want to bet on the metaverse need to look past the hype and choose a fund carefully, strategists say. Keep in mind that some metaverse ETFs have higher costs than the average index fund, and some don’t offer much diversification within the sector.

Consider the $6.25 million Fount Metaverse ETF (MTVR), and the $1.11 million First Trust Indxx Metaverse ETF (ARVR). Both have an expense ratio of 0.70%, while the average expense ratio for an ETF is 0.56%, according to Morningstar Direct.

Other metaverse funds are heavily weighted with tech stocks that could be affected by market volatility in the months ahead. For example, 40% of Fidelity’s FMET holdings are in 10 tech stocks—Apple Inc., Alphabet Inc., Tencent Holdings Ltd., Adobe Inc. Meta Platforms, Nintendo Co., Electronic Arts Inc., Nvidia, NetEase Inc. and Dassault Systèmes.

“It’s a very young fund class with a short track record," says Bryan Armour, Morningstar’s director of passive strategies research for North America. “There are risks when you invest in a theme that is just an idea with an ambiguous future."

Prepare for swings

Mr. Ball, a pioneer in the metaverse and author of “The Metaverse and How it Will Revolutionize Everything," says the backbone of the next iteration of the internet will require hardware; computing power; networking infrastructure; virtual platforms; technologies and protocols that power the 3-D internet; payment technologies; content; and identity assets. His Ball Metaverse Index diversifies holdings in these categories and includes public companies with a minimum $1 billion market capitalization that are adopting the metaverse as a core to their business. METV’s top holdings include Roblox, Apple, Nvidia, Unity Software Inc., Microsoft Corp. and Meta.

Investors in this thematic sector should be prepared for swings in the tech sector that show no signs of slowing down. The Nasdaq Composite Index is down about 32% this year, while the S&P 500 Information Technology Index is down about 31%. METV, the only metaverse fund with a one-year performance record, is down about 51.32% this year and has lost 50.96% since its inception.

“The declines are due to the widespread drop in tech, and really all stock prices," Mr. Ball says. Still, he estimates that less than 10% of METV investors “have sold out since the crash began earlier this year."

A thematic metaverse ETF should represent just a small percentage of an investor’s equity portfolio, investment strategists advise. “It’s a wild card, so it should represent 10% to 20% of your thematic equity holdings," says Mr. Hyman. “It’s a way to add extra spice to your portfolio. But it is a buy-and-hold opportunity which may not deliver returns in the near term."