You may not have visited it yourself, but you’ve likely heard of the metaverse and how it’s being touted as the “next big thing” in the tech and social media industries.
The metaverse, with its roots in role-playing games, is already teeming with apps and various forms of commercial activity, many of which offer investment potential.
Here’s a look at what the metaverse is, how it works, plus the best ways for retail investors like you and me to own a piece of the action.
Note: All forms of investment 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 key everyday services such as health, commerce, finance, transportation, and security.
In terms of the evolution of the Internet, it can be said that Web 1.0 connected people with information, while Web 2.0 connected them with the social media revolution.
Meanwhile, Web 3.0 involves the metaverse, where people are digitally connected to virtual places and things.
Instead of accessing the Internet in two dimensions through a screen, the metaverse allows people to inhabit virtual or augmented reality worlds and interact with one another in shared three-dimensional online spaces.
This could be for a variety of purposes, from business and shopping to recreational or leisure activities. The rebranding of social media giant Facebook to Meta clearly reflects the importance Mark Zuckerberg places on developing an online environment where people ‘live’ in a virtual universe.
From a business perspective, Dina Ting, head of global indices portfolio management at Franklin Templeton, describes the metaverse as “a merging of worlds that enables companies and content producers to target their audiences in entirely new ways and accelerate the digital value creation.
She says: “The metaverse will become the internet of internets, offering a seamless and immersive experience. with an avatar [an image representing the computer user]You will be able to walk through virtual environments and worlds to socialize, connect, shop, learn and collaborate through work.”
What are its applications?
In some industries, the move 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 are 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 projected to be worth around $270 billion by 2030.
The way professionals are trained in various fields, such as medicine, aviation, and security, is also being transformed by advances in virtual and augmented reality.
How big is the metaverse?
According to Axa Investment Managers, the metaverse “is already sizeable and growing at a rapid pace.”
Axa has estimated the size of the metaverse market, i.e. companies with a stake in metaverse-related activities, at around $500 billion in 2020 with the potential to grow to around $685 billion by the end of this year. year.
Dina Ting says that by 2030, the metaverse market could be worth $5 trillion: “It’s too big to ignore. In the first half of 2022, more than $120 billion was invested in the metaverse, twice as much as in 2021. From startups to big tech companies, venture capital and private equity,” she says.
What parts of the metaverse are worth investing in?
Axa says there are four sectors of the metaverse that present long-term investment opportunities:
- Gaming. The first building block of the metaverse, where the number of virtual and augmented reality headsets used in games is expected to rise from four million in 2021 to 42 million by 2025.
- socializing. It is increasingly taking place online and forming a critical part of the metaverse as people seek greater opportunities to connect.
- Labor. Where employees work from home and connect and collaborate online.
- Qualification. The enablers are the providers of semiconductors, network infrastructure, and the technologies that make the metaverse work, along with digital payment companies and cybersecurity companies.
Why invest in the metaverse?
According to Franklin Templeton’s Dina Ting, many large technology companies have turned to the metaverse for their next major area of development in much the same way they did at the dawn of the Internet: “There seem to be tremendous real-world business opportunities to invest in. This space
“We think we are on the cusp of the next wave, with decentralization – think smart contracts, cryptocurrencies and virtual markets. This is the next iteration of the internet, which is three-dimensional, decentralized, and highly interactive.”
Rob Burgeman, investment manager at RBC Brewin Dolphin, says: “Investing can often be very whimsical and fashion-focused and one of the most ‘trending’ areas right now is the metaverse. Fund houses love these trends as it allows them to issue new funds and attract fresh money, as well as create some excitement.”
Bestinvest’s Jason Hollands acknowledges that investing in the metaverse “sounds great.” But he cautions that before investors get caught up, they should inspect exactly which investment themes they are actually supporting: “A number of technology, software and video game businesses, and payment services that facilitate the use of online services, may claim to be involved. in the metaverse, or potential beneficiaries of it.”
How can I invest in the metaverse?
For retail investors, as with any niche investing area, there are basically two ways to gain exposure.
The first is by directly investing 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 its top 10 metaverse stocks to watch:
- drive software
IG says it selected these stocks based on their prominence in the Ball Metaverse Index. This index was formed to track startups and established companies developing technology for use in the metaverse.
The second way to gain exposure is through mutual funds biased toward metaverse-related stocks.
RBC Brewin Dolphin’s Rob Burgeman says: “Axa World Funds Metaverse is available on investment trading platforms and offers exposure to a wide range of companies, ranging from gaming companies such as Activision Blizzard and Electronic Arts, to social media companies. like Snap and technology. giants like Alphabet [Google’s parent]Microsoft and Meta.
“This fund was only launched in April in what has been a stormy time for tech companies and it has fallen by about 20% since launch. By comparison, over the same period, the Dow Jones Global Technology Index, a relevant investment benchmark for this sector, has fallen by around 14% in sterling terms.”
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 hold a basket of stocks and copy the performance of an investment benchmark.
“The Fidelity ETF offers exposure to a similar range of companies as the Axa fund, with its top holdings being Apple, Tencent Holdings, Alphabet, NetEase and Nintendo,” Burgeman explains.
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 deliver products and services around the metaverse and supporting blockchain technologies.”
Franklin Templeton, the manager behind the fund, says the portfolio aims to provide exposure to the stocks of publicly traded companies around the world that are involved in the metaverse.
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 mega-cap technology, communication services and payment companies.” from the US like Apple, Alphabet, Microsoft, Meta, Mastercard and Paypal, along with gaming giants like Electronic Arts and Take-Two Interactive Software, as well as Roblox, a platform for users to develop and share games.
“What you are getting in practice, therefore, will resemble a US technology 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 on the creation of this index, we sought to strike a balance between investability and relevance to this sector.”
Investment ability is what gives companies an advantage and helps them stand out from their rivals when seeking funding from investors.
“Companies are selected and weighted based on a combination of their relevance to the metaverse segment, and the market capitalizations of these companies can be as low as $100 million,” adds Ms. Ting.
That last figure may sound like a lot of money, but it’s a drop in the bucket compared to, say, tech giant Apple valued at around $2 trillion.
For a ‘purer’ exposure to the metaverse, insofar as VR gaming is a key thread, Bestinvest’s Jason Hollands suggests that investors could “target some of the biggest video game companies directly, or through a niche instrument like the Vaneck Vectors Gaming & Esports ETF.”
The latter owns shares such as Nvidia, the market leader in graphics processing units, and Advanced Micro Devices. Other notable holdings include Activision Blizzard and Electronic Arts, as well as Nintendo and Bandai Namco of Japan.
What will the future hold for the metaverse?
According to fund manager BlackRock, there are three reasons to think mass adoption of the metaverse could become a reality:
State-of-the-art hardware and increased computing power make it possible
Covid-19 accelerated the shift to digital life with people now more comfortable than ever working, shopping and socializing at home
· Cryptocurrencies could allow transactions to take place seamlessly and globally in the metaverse.
If you believe the hype, there is no doubt that the metaverse has the potential to have a considerable impact on various industries and business sectors. In turn, this strengthens the case for metaverse-related inversions.
To counteract this, it’s worth remembering that not every company at the forefront of a new iteration of technology stays the course.
Investors should be just as vigilant when weighing the prospects of a company involved in a cutting-edge industry as they are when considering the advantages of adding an “old economy” stock to their portfolio.