The first time I came across the term “Metaverse” was when Facebook changed its name to Meta in October last year. While I am still trying to wrap my head around digital reality, Metaverse has already become a buzzword and made headlines in the financial market.
When an investment concept gains traction from the market, related financial products such as ETFs will inevitably spring up in parallel with such market development. I have noticed that a number of ETFs investing in companies involved in businesses directly or indirectly related to Metaverse were launched globally in recent months. Some of them are passive ETFs which aim to track an underlying Metaverse theme index; some are active ETFs which do not track any underlying index with the portfolio manager actively managing a portfolio of securities and/or other assets such as money market instruments seeking to achieve a stated investment objective related to Metaverse.
Just like other ETFs, Metaverse theme ETFs generally have an investment portfolio, which includes a basket of constituent securities. For Metaverse theme ETFs, the constituent securities typically include companies from various tech sectors such as companies providing wearable devices of augment & virtual reality, computing power to support the operation of Metaverse particularly servers and semiconductors, virtual platforms to facilitate users interactions through virtual technologies, virtual contents including the design/creation of digital assets such as virtual goods and currencies, virtual services including virtual conferencing service, virtual classroom and digital payment service, video games, e-sports, gaming equipment, provision of services and platforms necessary for the functioning of the gaming ecosystem, and digital payments which support transactions in the Metaverse etc. It is important for the investors to fully understand the features and risks of the Metaverse theme ETF, including the investment objective, investment scope and the key strategy the ETF manager is using to manage the ETF before investment.
Risks of Metaverse ETFs
As Metaverse has evolved into a hype investment theme, investors may be drawn to its related ETFs. However, before making an investment decision, it is crucial to thoroughly understand the associated risks. For Metaverse ETFs, their risks include those from the Metaverse company(ies) they invest in:
- Given the definition of Metaverse is very wide and evolving, many companies may be considered relevant to the theme based on market sentiment or news coverage. As such, Metaverse ETFs may have differing underlying investments that vary significantly in terms of composition and performance.
- Some of those companies may be startups, which may have relatively limited operating histories and are still non-profitable. Their securities prices may be more volatile than other securities, especially in the short-term horizon. There may also be intense competition domestically and internationally which affect their profit margin adversely.
- Other Metaverse companies are subject to the following risks such as cybersecurity, significant capital investment, rapid change of technology, government intervention particularly on products deemed sensitive to national interests and regulation and intellectual property such as privacy and data protection. Also, Metaverse related companies may be subject to risks associated with different sectors including internet, software, semiconductor, entertainment, communication services and interactive media & services.
Investors should also be aware of the general risks associated with ETFs. If you are interested in Metaverse theme ETFs, do read their offering documents and product key facts statements to make an informative investment decision.
