Like Peter Parker in the cinematic Spider-verse, the various avatars of metaverse-themed ETFs are rapidly growing in number.

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

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

Definition of the metaverse

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

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

• Devices and Networks: This category includes headset and eyewear vendors, as well as the underlying network technology such as chips, edge computing, and cloud services.

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

• Transaction services: This category encompasses payment companies, including those like Coinbase (COIN) that facilitate crypto transactions, to identity service providers and marketplaces for trading virtual real estate and non-fungible tokens (NFTs).

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

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

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US Metaverse Thematic ETFs Overview

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 ETFs focused on decentralized finance (DeFi) and blockchain. Since they are more specialized or have a slightly different investment objective than metaverse-themed ETFs, they have been excluded from this analysis.

The first Metaverse ETF (METV) in the US was launched in mid-2021. Since then, five other similarly themed ETFs have been launched in the US. Their expense ratio ranges from 0.39% and 0.75%. Table 1 summarizes these six metaverse-themed ETFs:

Table 1: US Listed Metaverse-Themed ETFs

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

Five of the six ETFs in the metaverse track underlying indices, while one is active, i.e. not indexed. Regardless of whether or not their ETFs are indexed, the challenge managers of theme ETFs often face is finding enough publicly traded stocks that perfectly fit that theme.

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

As a result, these ETFs are not intended to be purely metaverse-focused stocks today. Rather, some of them pick stocks trying to predict which companies will earn their revenue from metaverse-related opportunities in the future.

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

Similarly, SEE “tracks a prospective index designed to capture the opportunity of the metaverse as it evolves.”

Holdings Comparison

Table 2 compares the main non-cash holdings of these ETFs:

Table 2: Major Constituent Holdings of US-Listed Metaverse-Themed ETFs

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

• When analyzing these ETFs, it is important to pay attention to their index weighting methodologies and the resulting stock concentration. Some of these ETFs, such as VERS and ARVR, are equally weighted, and therefore typically each stock is weighted in the 4-5% range. By contrast, in MTVR, only the three largest holdings accounted for more than 25% of the weight in the index, with Apple holding 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 of Facebook, is the antithesis of those principles and any market capitalization above zero is a direct attack on liberal democracy and the survival of our planet. For this reason, we intend to include a short position in META (Ticker: FB) that will be capped at 2% AUM.” This is in contrast to many of the other ETFs, most of which tend to have Meta Platforms.

Looking to the future

Given the growth projections in this space, it seems likely that more competitive ETFs will launch. Given that it has been less than a year since all of these ETFs were launched, it is still too early to judge which funds may emerge as potential category winners in terms of asset collection. As the space matures over time, we can expect more stocks focused on the pure gaming metaverse to remain in these ETFs.

Aniket Ullal is director of ETF data and analysis at CFRA Research.

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