You may not have visited it yourself, but chances are you’ve heard of the Metaverse and how it’s being touted as the “next big thing” in technology and social media.
The metaverse – with its roots in roleplaying – is already full of applications and various forms of commercial activity, many of which offer potential for investment.
Here’s a look at what the Metaverse is, how it works, and how small investors like you and I can best get in on the action.
Note: All investments are speculative and carry the potential for partial or total financial loss.
What is the metaverse?
Internet technology has become a dominant force in entertainment, socializing and work, supporting essential everyday services such as health, commerce, finance, transportation and security.
Regarding the development of the Internet, it can be said that Web 1.0 connected people to information, while Web 2.0 connected them to the social media revolution.
Web 3.0, on the other hand, encompasses the metaverse in which people are digitally connected to virtual places and things.
Rather than accessing the Internet through a two-dimensional screen, the Metaverse allows individuals to inhabit virtual or augmented reality worlds and interact with one another in shared, online three-dimensional spaces.
This can apply to a variety of purposes, from business and shopping to recreational or leisure activities. Social media giant Facebook’s renaming as Meta clearly reflects the importance Mark Zuckerberg places on developing an online environment where people “live” in a virtual universe.
From a commercial perspective, Dina Ting, Head of Global Index Portfolio Management at Franklin Templeton, describes the Metaverse as “a fusion of worlds that will enable businesses and content producers to engage their audiences in entirely new ways and accelerate digital value creation.”
She says, “The Metaverse becomes the Internet of Internets, delivering a seamless and immersive experience. With an avatar [an image representing the computer user]you will be able to walk through virtual worlds and environments to socialize, shop, learn and collaborate while you work.”
What are its uses?
In some industries, the transition to the Metaverse has already begun. For example, some companies hold meetings in virtual boardrooms, with avatars representing human counterparts.
Franklin Templeton’s Dina Ting says: “We’re already seeing companies
From preschoolers to college students, the Metaverse could also revolutionize the education industry. Ms Ting says the academic virtual learning market is expected to be worth around $270 billion by 2030.
Advances in virtual and augmented reality are also changing the way professionals are trained in various fields such as medicine, aviation and security.
How big is the metaverse?
According to Axa Investment Managers, the Metaverse is “already significant and growing rapidly.”
Axa has estimated the size of the metaverse market — that is, companies with an interest in metaverse-related activities — at approximately $500 billion in 2020, with the potential to grow to approximately $685 billion by the end of this year.
Dina Ting says the Metaverse market could be worth $5 trillion by 2030: “It’s too big to ignore. Over $120 billion was invested in the Metaverse in the first half of 2022, double what it was in 2021. From startups to large tech companies, venture capital and private equity,” she says.
Which parts of the metaverse are worth investing in?
According to Axa, there are four sectors of the metaverse that offer long-term investment opportunities:
- To play. The first building block of the metaverse, which will see the number of virtual and augmented reality headsets used in games grow from four million in 2021 to 42 million in 2025.
- conviviality. Increasingly happening online, forming a fundamental part of the metaverse as individuals seek greater ways to connect.
- To work. Where employees work from home and connect and collaborate online.
- Activate. Enablers are the providers of semiconductors, network infrastructure and the technologies that enable the metaverse to function, as well as digital payments companies and cybersecurity companies.
Why invest in the Metaverse?
According to Franklin Templeton’s Dina Ting, many big tech companies have been aligning themselves with the Metaverse for their next big area of development, just as many were doing at the dawn of the internet: “There seems to be tremendous real business opportunity to invest in this space.
“We believe we are on the cusp of the next wave with decentralization – think smart contracts, cryptocurrencies and virtual marketplaces. This is the next iteration of the internet that is 3-D, decentralized and highly interactive.”
Rob Burgeman, Investment Manager at RBC Brewin Dolphin says: “Investing can often be very fashionable and fashion driven and one of the hottest areas right now is the Metaverse. Fund houses love these trends as they allow them to launch new funds, attract fresh money and create excitement.”
Bestinvest’s Jason Hollands admits that investing in the metaverse “sounds great”. But he warns that investors should carefully consider what investment themes they support in practice before jumping in: “Various technology, software and video game companies – and payment services that facilitate the use of online services – can all claim to be involved to be in the metaverse or potential beneficiaries of it.”
How can I invest in the Metaverse?
As with any niche investing space, there are two main ways for retail investors to get involved.
The first is to invest directly in companies that facilitate the creation of the metaverse, for example by supplying the software or hardware that supports virtual or augmented reality worlds.
Spread betting platform IG Markets offers the following companies as their top 10 Metaverse stocks to watch:
- meta platforms
- Unity software
IG says it picked these stocks for their prominence in the Ball Metaverse Index. This index was formed to track emerging and established companies developing technology to be used in the Metaverse.
The second way to get exposure is through mutual funds that target Metaverse-related stocks.
Rob Burgeman of RBC Brewin Dolphin says: “Axa World Funds Metaverse is available on investment trading platforms and offers exposure to a wide range of companies ranging from gaming companies like Activision Blizzard and Electronic Arts to social media companies like Snap and Technology rich giants like Alphabet [Google’s parent]Microsoft and Meta.
“This fund only launched in April during a turbulent time for tech companies and is down around 20% since inception. In comparison, the Dow Jones Global Technology Index – an investment benchmark relevant to this sector – is down around 14% in sterling terms over the same period.”
Exchange Traded Funds
Investment house Fidelity launched its Metaverse Exchange Traded Fund (ETF) in September.
An ETF is a type of “passively managed” mutual fund that uses computer algorithms to track a basket of stocks and replicate the performance of an investment benchmark.
“The Fidelity ETF offers exposure to a similar selection of companies to the Axa fund, with its top holdings being Apple, Tencent Holdings, Alphabet, NetEase and Nintendo,” explains Mr. Burgeman.
The Solactive Global Metaverse Innovation Index – which is tracked by the Franklin Metaverse UCITS ETF – defines constituents as “companies that provide or use innovative technologies to provide products and services around the Metaverse and to support blockchain technologies”.
Franklin Templeton, the manager behind the fund, says the portfolio aims to provide equity exposure to public companies participating in the Metaverse around the world.
According to Jason Hollands, the fund is not unlike a US tech fund: “Look under the hood to see what it really means and you’ll find a list of the usual US mega-cap tech, communications services and payments companies such as Apple, Alphabet, Microsoft, Meta, Mastercard and Paypal, alongside video game giants such as Electronic Arts and Take-Two Interactive Software, and Roblox, a platform for users to create and share games.
“So what you get in practice will be similar to a US tech fund – 83% of the index is invested in US stocks – but with a strong bias towards video game companies within the portfolio.”
Franklin Templeton’s Dina Ting says: “By partnering with global index provider Solactive in creating this index, we have sought to strike a balance between investability and relevance to this sector”.
Investability gives companies an edge and helps them differentiate themselves from their competitors when seeking capital from investors.
“Companies are selected and weighted based on a combination of their relevance to the Metaverse segment, and the market capitalization of these companies can be as high as $100 million,” adds Ms. Ting.
The latter number might sound like a lot of money, but it’s a drop in the bucket when compared to companies like tech giant Apple, which is valued at about $2 trillion.
For “pure” exposure to the metaverse, Bestinvest’s Jason Hollands suggests that investors “take some of the larger video game companies directly or through a niche vehicle like Vaneck Vector’s Gaming & eSports ETF.”
The latter holds stocks such as Nvidia, a market leader in graphics processors, and Advanced Micro Devices. Other notable holdings include Activision Blizzard and Electronic Arts, as well as Japan’s Nintendo and Bandai Namco.
What will the future hold for the Metaverse?
According to fund manager BlackRock, there are three reasons mass adoption of the metaverse could become a reality:
· Next-generation hardware and increased computing power make it possible
· Covid-19 has accelerated the transition to digital living as people are now more convenient than ever to work, shop and socialize from home
· Cryptocurrencies could allow transactions to take place seamlessly and globally in the Metaverse.
If you believe the hype, there is little doubt that the metaverse has the potential to have a significant impact on various industries and business sectors. This, in turn, strengthens the case for Metaverse-related investments.
To counteract this, remember that not every company that is at the forefront of a new technology iteration stays the course.
Investors need to be just as vigilant when considering the prospects of a company operating in an innovative sector as they are when considering the merits of adding an “old economy” stock to their portfolio.