You may not have visited it yourself, but chances are you’ll have heard of the metaverse and how it is being promoted as the ‘next big thing’ in the technology and social media sectors.
The metaverse – with its roots in role-play gaming – is already awash with applications 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 such as you and me to own a piece of the action.
Note: all forms of investing 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, socialising and work, and it underpins key everyday services such as health, commerce, finance, transport and security.
In terms of internet evolution, Web 1.0 can be said to have connected people to information, while Web 2.0 connected them to the social media revolution.
Web 3.0, meanwhile, involves the metaverse, where people are connected digitally to virtual places and things.
Instead of accessing the internet in two dimensions through a screen, the metaverse allows individuals to inhabit virtual or augmented reality worlds and to interact with each other in shared, three-dimensional online spaces.
This could be for a variety of purposes, from business and shopping to recreational or leisure-based activities. The rebranding of social media giant Facebook to Meta clearly reflects the importance Mark Zuckerberg attaches to the development of 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 “an amalgamation of worlds that allows companies and content producers to address their target audience in entirely new ways and accelerate 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 around virtual worlds and settings to socialise, 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 businesses hold meetings in virtual boardrooms, with avatars representing human counterparts.
Franklin Templeton’s Dina Ting says: “We are already seeing companies
From pre-school pupils to university students, the metaverse could also revolutionise the education industry. Ms Ting says the academic virtual learning market is predicted to be worth around $270 billion by 2030.
How professionals are trained in various fields such as medical, aviation and security are 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 rapid pace”.
Axa has estimated the size of the metaverse market – that is, companies with a stake in metaverse-connected activities – at around $500 billion in 2020 with the potential to grow to around $685 billion by the end of this year.
Dina Ting says that, by 2030, the metaverse market could be worth $5 trillion: “It’s too big to be ignored. In the first half of 2022, over $120 billion has been invested in the metaverse, double that of 2021. From start-ups to large tech companies, venture capital & private equity,” she says.
Which parts of the metaverse are worth investing?
Axa says there are four sectors of the metaverse that present long-term investment opportunities:
- Gaming. The metaverse’s first building block, where the number of virtual and augmented reality headsets used in gaming is expected to grow from four million in 2021 to 42 million by 2025.
- Socialising. Increasingly taking place online and forming a fundamental part of the metaverse as individuals seek greater opportunities to connect.
- Working. Where employees work from home and connect and collaborate online.
- Enabling. Enablers are the providers of semiconductors, network infrastructure and the technologies that allow the metaverse to function, along with digital payment companies and cyber security businesses.
Why invest in the metaverse?
According to Franklin Templeton’s Dina Ting, many large tech companies have pivoted towards the metaverse for their next major area of development in the same way many did at the inception of the internet: “There appears to be tremendous real-world business opportunities for investment in this space.
“We believe that we’re on the cusp of the next wave, with decentralisation – think smart contracts, cryptocurrencies, and virtual marketplaces. This is the next iteration of the internet, which is 3-D, decentralised and highly interactive.”
Rob Burgeman, investment manager at RBC Brewin Dolphin, says: “Investment can often be very faddy and fashion-focused and one of the most ‘on trend’ areas at the moment is the metaverse. Fund houses love these trends, as it enables them to issue new funds and attract fresh money, as well creating some excitement.”
Bestinvest’s Jason Hollands acknowledges that investing in the metaverse “sounds great”. But he cautions that, before investors get stuck in, they should inspect exactly what investment themes they are supporting in practice: “Various technology, software and video gaming businesses – and payment services that facilitate use of online services – can all 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 investment area, there are broadly two ways to gain exposure.
The first is by investing 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 its top 10 metaverse stocks to watch:
- Meta platforms
- Unity software
IG says it selected these stocks based on their prominence in the Ball Metaverse Index. This index was formed to track emerging and established companies that develop technology to be used in the metaverse.
The second way to gain exposure is via investment funds tilted towards metaverse-related stocks.
RBC Brewin Dolphin’s Rob Burgeman says: “Axa World Funds Metaverse is available on investment trading platforms and offers an exposure to a broad range of companies, ranging from gaming companies such as Activision Blizzard and Electronic Arts, to social media companies like Snap, and technology behemoths such as Alphabet [Google’s parent], Microsoft and Meta.
“This fund was only launched in April in what has been a tempestuous time for technology companies and has fallen around 20% since launch. In comparison, over the same period, the Dow Jones Global Technology Index – an investment benchmark relevant to this sector – has fallen by around 14% in sterling terms.”
Investment house Fidelity launched its Metaverse exchange-traded fund (ETF) in September.
An ETF is a type of ‘passively managed’ investment fund that uses computer algorithms to hold a basket of stocks and copy the performance of an investing 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,” Mr 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 offer products and services around the metaverse and supporting blockchain technologies’.
Franklin Templeton, the manager behind the fund, says the portfolio aims to provide equity exposure to listed companies around the world that are involved in the metaverse.
According to Jason Hollands says the fund is not dissimilar to a US technology fund: “Look beneath the bonnet to see what it means in reality and you will find a roll-call of the usual US mega-cap technology, communication services and payment companies such as Apple, Alphabet, Microsoft, Meta, Mastercard and Paypal, alongside video 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 will therefore look similar to a US technology fund – 83% of the index is invested in US stocks – but with a strong skew towards video gaming companies within the portfolio.”
Franklin Templeton’s Dina Ting says that “by partnering with the Global Index provider Solactive in the creation of this index, we sought to achieve a balance between investability and relevance to this sector”.
Investability is what gives companies an edge and what helps them to stand out from their rivals when they seek funding from investors.
“Companies are selected and weighted based on a combination of their relevance to the metaverse segment and the market capitalisations of these companies can be as low as $100 million,” Ms Ting adds.
The latter figure might sound like a lot of money but is a drop in the ocean when compared with the likes of, say, tech giant Apple valued at around $2 trillion.
For a ‘purer’ exposure to the metaverse, in so far as virtual reality gaming is a key strand, Bestinvest’s Jason Hollands suggest investors could “target some of the larger video gaming companies directly, or via a niche instrument like the Vaneck Vectors Gaming & eSports ETF”.
The latter holds stocks like Nvidia, a market leader in graphic processing units, 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 the fund manager BlackRock, there are three reasons for thinking mass adoption of the metaverse could become a reality:
· next-generation hardware and increased computing power make it possible
· Covid-19 accelerated a shift to digital lives with people now more comfortable than ever working, shopping and socialising at home
· cryptocurrencies could allow transactions to take place seamlessly and globally in the metaverse.
If you believe the hype, there’s little doubt that the metaverse has the potential to make a sizeable impact on various industries and business sectors. In turn, this strengthens the case for metaverse-related investments.
Countering this, it’s worth remembering that not every company at the forefront of a new iteration of technology stays the course.
Investors need to be just as vigilant when weighing up the prospects of a business involved in a cutting-edge sector as they do when considering the merits of adding an ‘old economy’ stock into their portfolio.