Metaverse ETFs: A Rapidly Growing Universe

Much like Peter Parker in the cinematic Spider-verse, the different avatars of metaverse-themed ETFs are growing rapidly in number.

With the recent launches of the First Trust Indxx Metaverse ETF (ARVR) and the Fidelity Metaverse ETF (FMET), there are now six ETFs in the U.S. that provide exposure to the “metaverse” theme.

Interest from investors and ETF issuers in this theme is not surprising. CB Insights projects that revenues from metaverse-related opportunities will exceed $1 trillion by the end of this decade. Facebook famously changed its corporate name to Meta Inc. to emphasize its intended focus on this opportunity.

Defining The Metaverse

The metaverse can be broadly defined as emerging internet-based technologies and services focused on enhancing human experiences using augmented and virtual reality. There is no universally accepted definition of a metaverse-related business, and the ETFs that track this space have their own interpretations.

As a basic framework, we can consider metaverse-related opportunities to fall into one or more of the following four categories.

• Devices & Networks: This category includes the providers of headsets and glasses as well as the underlying network technology such as chips, edge computing and cloud services.

• VR Platforms & Software: This category encompasses 3D design engines such as Unity (U), modeling technology and other related software.

• Transaction Services: This category spans payment firms including those like Coinbase (COIN) that facilitate crypto transactions, to identity service providers and marketplaces for trading virtual real estate and nonfungible tokens (NFTs).

• Virtual Experiences & Services: This category includes the creators of virtual worlds such as Roblox (RBLX), video gaming and other immersive experiences.

In practice, products or firms will not always fall neatly into these categories. Sometimes a specific division within a company, and not the entire firm, may be focused on these opportunities. However, this can serve as a useful working framework for the investment opportunities that may fall into the metaverse space.

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Overview Of Metaverse Themed ETFs In The US

There are currently six ETFs that provide exposure to the Metaverse theme. There is also an ETF that focuses on console gaming (ETMG Video Game Tech ETF) as well as multiple decentralized finance (DeFi)- and blockchain-focused ETFs. Since those are more specialized or have a slightly different investment objective than the metaverse-themed ETFs, they have been excluded from this analysis.

The first metaverse ETF (METV) in the U.S. launched in mid-2021. Since then, five other similarly themed ETFs have launched in the U.S. They range in expense ratio from 0.39% to 0.75%. Table 1 summarizes these six metaverse-themed ETFs:

Table 1: Metaverse-Themed ETFs Listed In The US

Source: CFRA’s ETF database; ETF sponsor websites; data as of April 21, 2022

Five of the six metaverse ETFs track underlying indices, while one is active, i.e., nonindexed. Irrespective of whether or not their ETFs are indexed, the challenge that managers of thematic ETFs often face is finding enough publicly traded stocks that fall neatly into that theme.

Since this is a nascent space, most pure-play metaverse businesses are privately held startups, and therefore cannot be held in a traditional 1940 Act regulated ETF.

As a result, these ETFs don’t claim to hold purely metaverse-focused stocks today. Rather, some of them select stocks by trying to predict which companies will derive their revenues from metaverse-related opportunities in the future.

For example, MTVR tracks an index that “forecasts the 1 year forward revenue from metaverse technology related services or products by using a proprietary artificial intelligence algorithm. Only companies that are expected to derive more than 50% of their revenues from metaverse-related services or products are included in the index.”

Similarly, VERS “tracks a forward-looking index designed to capture the metaverse opportunity as it evolves.”

Comparing Holdings

Table 2 compares the top noncash holdings of these ETFs:

Table 2: Top Constituent Holdings Of Metaverse-Themed ETFs Listed In The US

Source: CFRA’s ETF database; ETF sponsor websites; data as of April 21, 2022

• When analyzing these ETFs, paying attention to their index weighting methodologies and the resultant stock concentration is important. Some of these ETFs like VERS and ARVR are equal weighted, and therefore typically each stock has a weight in the 4-5% range. By contrast, in MTVR, just the three largest holdings accounted for over 25% of the weight in the index, with Apple having a 17% share (as of April 21, 2022).

• Interestingly, the only active ETF in the space, PUNK, takes a very strong negative stance on Meta Platforms. To quote them: “This emerging technological and human advancement requires responsible companies dedicated to the principles of egalitarianism, democracy, sustainability, and facts. Therefore, we believe that Meta Platforms Inc., the parent company to Facebook, is antithetical to those principals and any market cap above zero is a direct assault on liberal democracy and the survival of our planet. For this reason, we intend to include a short position in META (Ticker: FB) which will be limited to 2% of AUM.” This contrasts with many of the other ETFs, most of which tend to hold Meta Platforms.

Looking Ahead

Given the projections for growth in this space, it seems likely that more competing ETFs will be launched. Since it has been less than a year since all these ETFs launched, it’s still too early to judge which funds may emerge as potential category winners in terms of gathering assets. As the space matures over time, we can expect more pure-play metaverse-focused stocks to be held in these ETFs.

Aniket Ullal is head of ETF Data & Analytics at CFRA Research.

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