METV: Not A Metaverse Pure Play (NYSEARCA:METV)

ETF Overview

The Roundhill Ball Metaverse ETF (NYSEARCA:METV) seeks to provide investors with exposure to the Metaverse by providing exposure to results that correspond to the performance of the Ball Metaverse Index.

The Ball Metaverse Index consists of a tiered weight portfolio of companies who are actively involved in the Metaverse.

METV currently has net assets of $414 million and has an expense ratio of 0.59%. The fund currently holds 46 securities.

While the fund is invested in companies that are “involved” in the Metaverse, I do not view the Metaverse as the primary reason for most of the companies that METV holds. Thus, I believe the performance of METV will be largely driven by factors other than the success or failure of the Metaverse.

Investors should avoid buying METV and focus instead on identifying companies that have exposure to the Metaverse but offer a compelling investment for other reasons.

High Management Fee

METV charges a relatively high management fee of 0.59%. To put that into context, the average expense ratio for an actively managed equity mutual fund is ~0.66% and the average equity ETF expense ratio is ~0.16%. Comparably, the Invesco QQQ Trust ETF (QQQ), which tracks the Nasdaq- 100 has an expense ratio of just 0.20% and the Invesco NASDAQ 100 ETF (QQQM) has an expense ratio of just 0.15%. Another Metaverse focused ETF, the iShares Future Metaverse Tech and Communications ETF (IVRS) has an expense ratio of 0.47% while the Global X Metaverse ETF (VR) charges an expense ratio of 0.50%.

As an investor, I work diligently to avoid high management fees (active or passive), as I believe they are often an overlooked headwind when investing.

Weak Relative Historical Performance

METV launched in June 2021 and has significantly underperformed other tech investment vehicles. Since inception, METV has delivered a total return of -34.4% compared to a return of 3.75% delivered by the Nasdaq-100 which can be proxied by using the Invesco QQQ Trust ETF (QQQ).

Defining The Metaverse

The Metaverse is not particularly easy to define. Roundhill Ball has defined the Metaverse as:

“A successor to the current internet that will be interoperable, persistent, synchronous, open to unlimited participants with a fully functioning economy, and an experience that spans the virtual and ‘real’ world.”

Meta Platforms, Inc. (META) CEO Mark Zuckerberg has said:

“It is a virtual environment where you can be present with people in digital spaces… it’s an embodied Internet that you are inside of rather than just looking at. We believe this is going to be the successor to the mobile Internet.”

My personal view is that the Metaverse represents a 3D space where individuals can interact with each other along with a virtual world. The fact that the Metaverse is so difficult to define is due in part to the fact that the concept is still in the early stages of being developed. This makes it difficult to determine which companies will end up coming out on top.

Holdings Analysis

As shown by the table below, METV is fairly diversified with the top 5 holdings accounting for ~33.5% of the fund. Comparably, the top 5 holdings of the Nasdaq-100 account for ~37% of the index.

METV’s holdings include companies developing infrastructure for the Metaverse such as Nvidia, companies creating virtual worlds such as Meta Platforms, Inc. (META) and Roblox Corporation (RBLX), and pioneers in the content, commerce, and social for the Metaverse such as Tencent.

One important thing to note with METV is that the fund is not a pure play on the Metaverse. While all the companies held by METV have exposure to the Metaverse, it is not currently the primary driver for most of these companies.

For example, Apple Inc. (AAPL) recently debuted its Apple Vision Pro headset, but this business will not account for a material part of AAPL’s business for a very long time (if the product is successful in the end).

High Dispersion of Holdings

The chart below shows the performance of METV’s top 5 holdings since the inception of the fund. METV’s underlying holdings have exhibited a wide range of performance. The best performing of the top holdings, NVIDIA Corporation (NVDA) has delivered a total return of 125.4% while the worst performer Roblox Corporation (RBLX) has delivered a total return of -61.2%.

Given the high dispersion of the underlying holdings in METV, I think it is worthwhile for investors to evaluate which stock or group of stocks from the fund are worth owning vs. simply buying METV.

Additionally, the wide range of performance of the top holdings of METV suggests they are not being driven by their common exposure to the Metaverse. Instead, each stock is being driven by other factors.

Roblox Challenges

METV’s largest holding Roblox Corporation (RBLX), which accounts for ~9.76% of the fund, has declined due to concerns over the profitability of its existing gaming platform and concerns about potential child abuse on the platform.

I am particularly concerned about RBLX going forward due to its valuation. Despite a significant drop in price over the past two years RBLX still receives a valuation grade of D from Seeking Alpha quant scores. The company is not expected to generate positive EPS through 2027, and thus I have serious concerns about the attractiveness of the stock. Given its large weight in METV, negative performance by RBLX going forward will weigh on METV.

My Preferred Alternative to METV

Given the fact that we are in the very early stages of understanding how the Metaverse will evolve, I think it is difficult to know which companies will end up leading the way. For this reason, I believe any Metaverse investment must also consider the other drivers relating to that investment.

One company which has excellent exposure to the Metaverse along with other positive investment drivers is Meta Platforms, Inc. (META) which I’ve written further about in my recent article Meta 8 Reasons Why I Am Initiating A Strong Buy.

Conclusion

METV represents a relatively unique ETF as it is one of the only ETFs to focus on the Metaverse. However, METV charges a relatively high management fee and does not offer pure play exposure to the Metaverse. Most of the holdings of METV are primarily driven by factors other than the Metaverse right now. Since inception, METV has significantly underperformed other tech investment vehicles such as the Invesco QQQ Trust ETF (QQQ).

Investors who want to consider getting exposure to the Metaverse should consider META as a viable alternative to METV. In addition to its Metaverse positioning, META also has significant other investment drivers which I believe make the stock attractive. Moreover. META also enjoys bullish ratings from both the Seeking Alpha and Wall Street analysts.