What is the metaverse and should you invest in it?

Online worlds could become big money spinners for companies. Here’s everything you need to know.

The hottest theme in technology right now is the “metaverse”, a virtual reality world where people can work, play games and socialise.

From Facebook changing its name to Meta Platforms (NASDAQ:FB) and pledging to invest $10 billion a year into building a metaverse, to digital goods changing hands for thousands of pounds, online worlds where real money is spent are widely expected to take off over the next decade.

Nigel Bolton, co-chief investment officer of BlackRock Fundamental Equities, says it’s not a question of if the metaverse is going to be big, but when and how.

He notes: “At this point, the metaverse is much like the internet of the early 1990s or the smartphone of the early 2000s. We know it's going to be big, and it's going to change people's day-to-day lives.”

Bolton expects virtual reality headsets and augmented reality glasses, along with powerful 5G mobile networks, to take this world to the next level and generate vast profits for companies involved in it.

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Technology investors are positioning their funds to reap rewards from the metaverse. Ben Rogoff, manager of the £3 billion Polar Capital Technology (LSE:PCT), says the trust has a significant amount of metaverse exposure via Meta (Facebook), computer chip designer NVIDIA (NASDAQ:NVDA) and online world Roblox (NYSE:RBLX), as well as chipmakers and cloud computing companies that he argues should all benefit from the infrastructure required to support the metaverse.  

Rogoff has not positioned the trust’s holdings to only profit from this narrow theme and owns a diversified portfolio of proven technology businesses. His top holdings are Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL), all of which have highly profitable core businesses but are also involved in cloud computing and virtual reality.

Mark Hawtin, manager of the GAM Star Disruptive Growth fund, argues that it is not just gaming that is at the centre of the metaverse, but also fashion and manufacturing.

He said: “Gucci launched a virtual store on the Roblox platform and have seen 20 million visitors: the experience is so much more immersive than a Facebook page or a short form video clip. It is estimated that $100 billion will be spent on virtual goods in 2021.

“Boeing has announced it is creating a digital world built on virtual and augmented reality to design its next airplane. By creating a 3D immersive environment twinned with robots that speak to each other, and mechanics connected by $3,500 HaloLens headsets made by Microsoft, it will be possible to streamline and improve the process significantly, according to the firm.”

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Aside from investing in generalist technology funds, there are ways of accessing companies involved in the metaverse more directly.

HanETF has launched the ETC Group Global Metaverse ETF (LSE:METR), ticker “METR”. It provides exposure to companies involved in the metaverse, such augmented and virtual reality, 3D graphics, semiconductors and online gaming. The exchange-traded fund’s top holdings include Apple, Snap (NYSE:SNAP), Roblox, and Meta. It costs 0.65% a year.

HanETF said: “The world’s most recognised investment banks have already scoped out the total addressable market. Morgan Stanley sees Metaverse-related businesses combined creating an $8.3 trillion opportunity in the US alone. Goldman Sachs sees an ultimate valuation of more than $12 trillion globally.

“The pace of change may be even more rapid than that. Given that digital asset markets have grown from a $10 billion industry to one worth $2 trillion in less than six years.”

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However, investors should tread carefully as many stocks associated with the metaverse are unprofitable businesses with high expectations for growth. This means that failing to meet lofty expectations could trigger heavy share price falls.

For example, Roblox shares have dropped 64% from their peak in November 2021. The computer game company has never made a profit and only floated its shares at the beginning of last year.

It is not just Roblox that has suffered in the past six months, the Solactive ETC Group Global Metaverse index, which METR tracks, has fallen 22% so far this year as investors have turned to cheap “value” stocks instead of more expensive “growth” shares.