The investment fund industry went through a period of intense hype for technology themes, including the metaverse.BlackSalmon/iStockPhoto / Getty Images
Rest in peace metaverse exchange-traded funds (ETFs).
The closure of Fidelity Total Metaverse ETF in September follows that of Evolve Metaverse ETF earlier this year, as interest declines in a once-hot investment theme.
It’s not just metaverse ETFs. Other innovation-themed ETFs have shut down recently, including dozens in the U.S. such as Defiance Pure Electric Vehicle ETF and VanEck Future of Food ETF.
None of this is surprising, says Simon Hale, senior wealth advisor and portfolio manager with Hale Investment Group at Wellington-Altus Private Wealth Inc. in Montreal.
“We frequently have conversations with clients about these kinds of investments,” he says. Innovation-themed ETFs are not part of the firm’s model portfolios for clients, “but their interest keeps us on our toes.”
That innovation-themed ETFs such as the metaverse funds are closing reflects how fund launches are often driven by speculative excitement rather than investment fundamentals.
“These always start with a lot of hype, but when profits don’t materialize, investors lose interest and often sell at a loss,” Mr. Hale says.
Indeed, the industry has just gone through a period of intense hype for several technology themes, says Daniel Straus, managing director of ETFs and financial products research at National Bank Financial Markets in Toronto.
“In the pandemic, there was this frenzied experimentation going on with ETF issuers,” he says.
Metaverse ETFs – often with large positions in Meta Platforms Inc. META-Q and Roblox Corp. RBLX-N – symbolized that “frenzied” growth and the ensuing contraction of innovation-themed funds.
In 2021, the metaverse created a “huge amount of buzz” with the arrival of the first ETF focused on the idea, Mr. Straus says. The Roundhill Ball Metaverse ETF METV-A had almost US$1-billion in assets under management (AUM) in early 2022, but price declines and outflows have brought AUM down to US$362-million.
“Next thing you knew, there were a bunch of metaverse ETFs,” says Mr. Straus, noting the irony of the term, gleaned from 1990s science fiction satirical novel Snow Crash, becoming a serious investment theme.
“If you had told my science-fiction, nerdy high-school self that in the future there would be metaverse investments but no real metaverse, I probably wouldn’t have believed it.”
Metaverse ETFs aside, the constant stream of innovation ETF launches does pique the curiosity of investors, arousing a speculative investment itch, Mr. Hale says. The trials and tribulations of the metaverse theme are typical of past technological innovations. “It’s like the internet in the 1990s.”
For example, Microsoft Corp. MSFT-Q, Intel Corp. INTC-Q and Cisco Systems Inc. CSCO-Q were very promising investments then. Although all are still around today, only Microsoft would be a profitable investment if investors purchased those stocks at their peak before the dot-com bubble burst.
Even then, Microsoft’s share price only surpassed its 2000 high in the mid-2010s. Most investors don’t have that much patience, Mr. Hale says.
That hype gets ahead of profitability is not lost on ETF providers.
“When we develop thematic ETFs, we put ideas through a lengthy process,” says Raj Lala, president of Evolve Funds Group Inc., noting demand for these products often arises from advisor and other investor requests.
The first question to answer is whether a “solid, long-term investment thesis” exists, he says, or whether it could be a fad.
“I don’t want to say it was a fad because I think it’s still too early to call the metaverse that,” Mr. Lala says.
The next step is determining whether an investible market exists. In the case of the metaverse, companies such as Meta and Roblox suggested the investible market was there.
Even so, demand failed to materialize. The firm’s metaverse ETF only attracted a few million dollars, a sliver of Evolve’s almost $8-billion in AUM.
A couple of metaverse ETFs are still operating in Canada. Global X Metaverse Index ETF MTAV-T, which launched in 2021, has almost $6-million in AUM, while CI Galaxy Metaverse Index ETF CMVX-T, launched in 2022, has $1.4-million in AUM.
To be considered financially viable, an ETF generally needs $50-million AUM in Canada, Mr. Straus says. And that’s a tough hill to climb if the ETF isn’t first to market.
“Unless others have a huge advantage in fees, performance or something else, it’s very difficult to dislodge first movers,” he notes.
Providers such as Evolve recognize the challenges and are changing strategy. The company is now more focused on broad-market products.
“Rather than thematics that target 1 or 2 per cent of portfolios, a broad-market ETF is more suitable to a 10- to 20-per-cent allocation,” Mr. Lala says.
Consequently, ETFs addressing a key need in the equity or fixed income sleeves in portfolios are also likely to garner the AUM to be sustainable, he adds.
Still, innovation ETFs – especially for themes such as artificial intelligence, cybersecurity and clean energy – will always intrigue some clients, Mr. Hale says.
“If they really want to own it, we can buy it for them,” he says, noting the fund would be held outside clients’ core managed portfolio.
As an alternate choice, Mr. Hale has occasionally recommended Fidelity Global Innovators ETF FINN-NE, which is based on a successful mutual fund.
More often, though, discussions focus on how clients already have significant exposure to technological innovation in their portfolios through the mega-cap Magnificent Seven stocks, which make up a significant share of major indexes such as the S&P 500.
“I remind them that they don’t have to own a thematic ETF holding a bunch of companies that may or may not be making money when they already own innovative Big Tech companies that are growing and already very profitable,” Mr. Hale says.
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