Chris Matta, president of 3iQ Digital Assets, envisions the metaverse or virtual reality ETF space booming in future. He said, “Growth is going to be exponential in the next 10 years.”
He added, “Growth is not limited to finance and the creator economy. This is broadly sweeping across all industries, from healthcare and real estate to gaming and finance. There are new metaverse ETFs launching every day.”
2022 has seen a whirlwind of launches in the sector, which ETC Group founder and co-CEO Bradley Duke sees as an $800 billion market opportunity as billions of users engage in alternative worlds where they can socialize, play games, buy digital land and conduct business. ETC just launched its Metaverse UCITS ETF (METR) in Europe, joining other names such as the Roundhill Ball Metaverse UCITS ETF (METV) in Germany, and the ProShares Metaverse ETF (VERS).
ETC’s ETF, in partnership with HANetf, will track the Solactive ETC Group Global Metaverse Index, which lists companies active in virtual and alternative reality, 3D graphics, semiconductors, high-speed wireless communications, online gaming and video streaming among other industries and themes.
Web 3 to the fore
Many of the latest ETFs focus on firms with a growing exposure to the metaverse – such as Microsoft (MSFT), Nvidia (NVDA) or Apple (AAPL) – and some of its infrastructure. However, future vehicles will likely invest in so-called Web 3 or the new blockchain-powered internet using decentralized technology and cryptocurrencies such as Bitcoin, Ethereum (ETH) or Solana powering much of the metaverse, once regulations become more flexible.
Currently, investors cannot hold crypto through ETFs, though they can invest in futures-based alternatives. However, market observers expect regulators in the U.S. to allow this by late 2022. When that happens, 3iQ may introduce a crypto-focused metaverse fund to enable clients to buy diverse coins including Ethereum, the cryptocurrency behind many metaverse and gaming platforms such as Decentraland, Solana or Axie Infinity.
“We don’t have a metaverse product today but are active and dabbling in the metaverse and building our own HQs in it. We will probably package products around the metaverse in the future,” Matta said.
Doug Schwenk, CEO of industry consultancy Digital Asset Research, agrees future growth will be huge and could even double this year. “It’s a hot space and a lot could depend on whether ETFs can include cryptos involved in the metaverse. People are looking for a chance to invest in these metaverse cryptos and the SEC is very active in considering if they will allow an ETF with a majority of crypto assets, possibly in the fourth quarter.”
Schwenk expects future funds will also bankroll the nuts and bolts of metaverse technology including some of the ‘seven layers’ that the new Subversive Metaverse ETF (PUNK) has said it will support, including “metaverse experience, discovery, creator, economy, spatial computing, decentralization, human, interface and infrastructure,”
“When you think of the metaverse you think of a virtual online place and experience and there are a bunch of layers there including computer and chip providers as well as infrastructure and anything that makes it possible,” Schwenk said. “When you look at equities, the amount of companies investors can put money into is narrower.”
The industry needs clearer definitions of what is and isn’t metaverse to reach its next milestone, however.
“One of the problems is that the metaverse definition is not well understood, so you can include companies in the periphery of metaverse that are not directly involved,” explains Schwenk. “That creates an opportunity to invest in whatever asset as well as confusion about what the technology is. We need a more standard definition of what the metaverse is.”
With an eye to the future, analysts expect Europe will drive fund innovation with exchange traded products (ETPs) such as the 21 Shares Decentraland ETP (which invests in the Decentraland platform allowing users to buy and sell digital land), as well as new ETFs to directly hold non-fungible tokens (NFTs), which are used to buy art, real-estate, gaming assets, and other things.
“We have heard of many products that will sponsor ETFs in different categories including crypto and NFTs, especially in the Nordics and Germany,” said Schwenk. “We will probably see the first ETFs focused on NFTs and diverse crypto assets in Europe first.”
He also expects the Asian market to grow strongly though regulations there could keep it behind Europe.
The latest major fund to hit the region is Hong Kong’s CSOP Metaverse Concept ETF (3034.HK) which backs U.S.-listed companies that directly or indirectly provide products or services contributing to the development of the metaverse. Top holdings include Meta Platforms, Nvidia, Advanced Micro Devices (AMD) and Sony.
“In Asia, ETF demand is stronger than in Europe but regulatory frameworks in Japan are strict and South Korea is introducing new regulations that could be a challenge,” Schwenk said. “Historically, Asia also hasn’t launched ETFs as quickly as Europe has.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.