Is the metaverse the new ETF financial frontier?

Why is the metaverse the new financial frontier for exchange-traded funds (ETFs)?

Two companies, which both began trading their metaverse funds yesterday, have similar answers: this is the advent of the new equivalent of the internet, which could change our lives in unforeseen ways. So, it’s financially worth it to get in on the ground floor of the explosive growth that’s bound to come.

“We’ve been working on our metaverse product for almost the entire 2021,” Steve Hawkins, President and CEO of Horizons ETFs Management (Canada), told Wealth Professional when it launched its new passively managed Horizons Global Metaverse Index ETF. "The catalyst to get something out there was Facebook changing its name to Meta and making the term 'metaverse' known in every household and getting people talking about what a metaverse is.”

Hawkins said there’s a lot of discussion around this and it took Horizons eight months to break it down into the underlying segments and figure out which companies would be involved with, or profit from, its growth. Horizons finally defined seven company categories: augmented (AR) and virtual (VR) reality, creator economy (for the software tools, social media, and other distribution platforms), digital infrastructure, digital marketplace, digital payments, and gaming.

“The way that we interact has changed so substantially because of COVID,” he added, “and it’s only going to grow the metaverse as we see it because the whole digital virtual landscape is changing every single day and it’s only going to get huge from here. It’s already big and it’s only going to get bigger.”

Horizons’ new fund has 50 companies, many global, such as Apple, Facebook, Google, Disney, and Adobe. Others, like Alibaba and Amazon, will benefit from the e-commerce.

Hawkins noted that Horizons opted to use an index provider whose algorithmic system can scrape all data from publicly-available companies in the developed and emerging markets to keep updating the fund.

“We believe we’re capturing global access to the metaverse and the companies that can profit from it,” he said. “It’s very important to capture as much as you can and not miss out on different pieces. It’s not the names that you include that create the biggest winners in your portfolio, it’s the underperformance generated by the names you don’t have.

“We’ve learned so much about the metaverse through this process and how it will affect us on a day-to-day basis going forward. It already has affected us, but technology is changing every day,” said Hawkins, adding that its fund now is trading on the Toronto Stock Exchange (TSX), but its partners and related companies are launching metaverse ETF funds in the U.S., Korea, and Hong Kong.  

The fund seeks to replicate the performance of the Solactive Global Metaverse Index fund, designed to provide exposure to global, publicly listed companies that could potentially benefit from the use of technologies expected to grow with the metaverse. Hawkins said passive management brings both a breadth and depth of companies to it.  

“The ETF marketplace just continues to grow very nicely, and we think this is an important addition to the overall ETF landscape for Canadian investors to choose from,” he said. “Overall, we see a huge growth opportunity from an investment perspective.”

Evolve ETFs also started trading its Evolve Metaverse ETF, an actively-managed fund, on the TSX yesterday. Raj Lala, Evolve’s President and CEO, said it also began considering this a year ago, but much more so in the summer.   

“It was listening to people like Mark Zuckerberg talking about how big the space was going to be,” he said, “and then we started to see some of the CEOs of big tech firms making plans to increase their spending in the space and declaring this was going to be a big industry. So, that’s when we started to focus on it a little bit more. Then, probably the catalyst for us to move quicker was really when Facebook made that announcement last month to change its name to Meta and all the ripple effect of that, not just within Facebook, but other organizations quickly talking about their plans to get involved in metaverse-based technologies.”

Lala said Evolve, which also has global funds, opted to go active because it didn’t feel any of the index’s proper classification systems would work. It also felt that would allow it to be nimbler, so “we could pivot quickly toward companies that are more focused in this technology".

Evolve’s fund is initially focusing on AR and VR, such as hardware and semi-conductors, software, which includes the creative tools, and the platforms, which includes developing and operating 3D technology. Lala said he can see the metaverse being used in both education and online shopping.

He was philosophical about the fact that two companies have launched at exactly the same time.

“It’s good to have variety,” said Lala. “We think it’s positive for the industry to have more participants, for sure.”