METV - METV: Too Much Overlap And Too Pricey

2023-06-07 21:31:01 ET

Summary

• The Roundhill Ball Metaverse ETF has a high expense ratio of 0.59%.
• The metaverse market is predicted to grow significantly, but the ETF's composition overlaps with other investments such as Nasdaq, Semiconductor, or Gaming ETFs.
• Investors should consider saving on the expense ratio and opt for cheaper alternatives to gain exposure to the metaverse market.

Investment thesis

The Roundhill Ball Metaverse ETF ( METV ) is a thematic ETF from Roundhill Investments ( launched 6/21/21). The expense ratio is 0.59%, and the assets under management are currently $485M. It is rather concentrated, with 50 holdings. Although I'm bullish on many of the stocks, I still see no reason to pay this expense ratio because the ETF consists mainly of stocks that are already top positions in numerous ETFs. You can get a similar exposure much cheaper via a Nasdaq ETF, for example.

Metaverse introduction

Metaverse was a buzzword of 2021: It combines the prefix "meta", meaning beyond, and "universe". A meaningful event was the symbolic name change from Facebook to Meta Platforms ( META ) to reflect its future business model accurately. Similar to how Google renamed itself Alphabet ( GOOG ) because Google now consisted of much more than just the search engine. In his " Founder's Letter ", published on October 28, 2021, Mark Zuckerberg wrote:

The defining quality of the metaverse will be a feeling of presence — like you are right there with another person or in another place. Feeling truly present with another person is the ultimate dream of social technology. That is why we are focused on building this.

In the metaverse, you’ll be able to do almost anything you can imagine — get together with friends and family, work, learn, play, shop, create — as well as completely new experiences that don’t really fit how we think about computers or phones today.

Sometimes I see the terms VR and AR used almost interchangeably. But that is not correct. META's vision is a virtual reality that you can fully immerse yourself in, while Apple (AAPL) recently introduced AR glasses that extend the reality you experience, blending reality and virtual reality. AR has advantages: You can get more information in real-time without leaving actual reality, e.g., you can see a displayed map or a huge computer screen in front of you while still seeing the normal environment you are in, chat messages that can be read or sent by voice command, etc. According to Mark Zuckerberg, VR is more comprehensive and offers more possibilities.

You’ll move across these experiences on different devices — augmented reality glasses to stay present in the physical world, virtual reality to be fully immersed, and phones and computers to jump in from existing platforms. This isn’t about spending more time on screens; it’s about making the time we already spend better.

However, considering the cumbersome designs and short battery life of the devices, it's fair to say that both technologies are still in the nascent stages of development. Probably only a small group of early adopters will use these devices for years to come, also due to the high price of Apple's glasses, starting at $3500.

The similarities and differences to the beginning of the internet

If people were asked about the future of the Internet back in 1995, most of them would have likely underestimated its potential. Our brain can hardly imagine things that do not yet exist and have never been existing. When the market began to realize the possibilities, a boom set in that ultimately formed the Internet bubble - the rest is history. Back then, the issue wasn't the lack of prospects but rather the immense valuations, intense competition, and prevalence of unprofitable companies. In this respect, the situation is different today: Many companies in the ETF are already making massive profits, which can be used to pay for the research and development of the Metaverse. At the same time, there is not such a large number of competitors, as new companies have enormous difficulty keeping up with existing companies' financial power.

However, one similarity with the early days of the internet is that the technical possibilities are not yet advanced enough to implement everything that developers dream of. Back then, everything was limited by computing power, internet bandwidth, and access. Today, the limits are also partly due to the computing power, the heat generated that has to be conducted away, and the batteries.

However, research developed very quickly back then, and most likely, this will repeat. Comparisons with the early days of the Internet are reasonable but with better preconditions for investors. Most companies in this ETF are mature, profitable companies. A possible Metaverse simply adds another new growth area.

The future growth of the Metaverse

The metaverse could change and expand our world in a far-reaching way. But at the moment, we are still at the beginning of the development of hardware and software; this has several reasons: First, computing power and batteries are not good enough right now to put all that tech in a pair of glasses, not yet good enough for a very realistic representation. But technological leaps will continue, and Metaverse devices will most likely benefit from battery research for electric vehicles and renewable energy, as we need better ways to store energy. One example is the solid-state battery.

Furthermore, on the hardware side, quantum computers could drive significant advancements, while artificial intelligence could revolutionize the software aspect. Possibilities that arise from this are, e.g., real-time adaptations of the interactive world to the wishes and personality of the user, realistic real-time holograms, and will sooner or later lead to real and virtual realities blurring together. Internet companies will drive this development because there are numerous potential benefits and applications.

What new business models (and new types of ads) will ultimately emerge remains to be seen. So far, the obvious ones are live entertainment, gaming, social networking, virtual business meetings, etc. Some time ago, I saw a YouTube video that described how artificial intelligence would change the world in computer games in real-time and can adapt to the player: To his preferences and the way he wants to be in the game. Even the music could be adjusted in real-time. This means that every player gets his own version tailored to him. That´s fascinating.

According to accountancy firm PricewaterhouseCoopers , the virtual and augmented reality market is predicted to grow in value from $46.4 billion in 2019 to $1.5 trillion in 2030. I don't find such long-term estimates meaningful; it simply goes too far into the future and can't consider what innovations will occur by then. What is certain, however, is that the application areas are numerous; new use cases will emerge that we cannot yet imagine today.

ETF composition

With all that said, let's look closer at the ETF. According to Roundhill, METV will provide exposure to

• Companies developing infrastructure (computing power, hardware, networks, payment systems) essential to the Metaverse
• Gaming companies responsible for the creation of virtual worlds (this includes game developers as well as gaming engines)
• Pioneers in content, commerce, and social for the Metaverse (identify services, virtual platforms)

The top 10 holdings account for about 50% of the ETF and are well-known heavyweights:

I don't see any reason to buy this ETF, even if I am bullish on the top 10 positions. Just about everyone will own some of the companies as individual stocks or already in the form of even broader or other thematic ETFs. There is no reason to pay an expense ratio of 0.59%. You could just buy a Nasdaq ETF or stocks with no expense ratio and probably lower spreads.

Conclusion

The metaverse is a fascinating topic with a lot of growth ahead. But that does not necessarily mean that this ETF is automatically a must-have. Everyone should examine the potential overlap with existing investments for themselves. I think the overlap with the Nasdaq, Semiconductor, or Gaming ETFs is too significant. You can put a lot of things under the Metaverse label. From my point of view, investors should save on this expensive expense ratio.

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