META ETF: The Metaverse Provides New Opportunities For Tech Stocks – Seeking Alpha

Investment Thesis

The Roundhill Ball Metaverse ETF (NYSEARCA:METV) is designed to offer investors exposure to the Metaverse. Emerging technologies such as virtual reality and game engines allow the Metaverse to take form and grow as they seek to expand the capabilities of a virtual world.

Based on data from Bloomberg Intelligence and Ark Invest, the Metaverse is expected to be one of the fastest-growing tech segments, and to more than double by 2025. Despite the exciting prospects, I believe the market is still evolving, and it is hard to pick the winners as of now. If we look at valuations across the portfolio, I believe many constituents are overvalued, and long-term investors would be better off holding long-term dated call options rather than buying the underlying stock. That said, METV can be a great choice for speculators looking to exploit the strategy’s volatility in the short term.

Strategy Details

The Roundhill Ball Metaverse ETF tracks the Ball Metaverse Index. The strategy seeks to get exposure to the Metaverse, which may be characterized as a replacement for the present internet providing an experience that interconnects the virtual and real worlds. This includes companies involved in computing, networking, virtual platforms, interchange standards, and payments.

If you want to learn more about the strategy, please click here.

Portfolio Composition

From the sector allocation chart below, we can see that the fund places a high weight on companies offering Gaming Platforms (~20%), followed by Computing Components providers (~19%) and companies developing Cloud Solutions (16%). In total, the top 3 sectors account for ~55% of the fund’s total assets. In terms of geographical distribution, nearly ~81% of the fund is invested in the US, followed by Singapore (~4.6%) and South Korea (~4%).

METV invests ~46% of funds in large-cap growth stock, characterized as large-sized companies where growth factors predominate. Large-cap firms are generally classified as companies with a market cap above $10 billion. The second-largest allocation is large-cap blend equities, which account for 25% of total assets. It is interesting to see that METV invests ~66% of the funds in growth stocks, which are generally more volatile than value stocks. At the same time, small-cap issuers are underrepresented given the low weight. Some investors prefer a higher exposure to small- and mid-cap stocks given their potential to outperform large-caps over a long period of time.

The fund is currently invested in ~43 different stocks. The top 10 holdings represent ~44% of the portfolio, with no single stock weighting more than ~9%. In my opinion, METV is pretty well-diversified, as I feel there are a limited number of companies in this niche at the moment.

Since we are dealing with equities, one important characteristic is the portfolio’s valuation. According to data from Morningstar, the fund currently trades at a price-to-book ratio of ~5 and an average price-to-earnings ratio of ~23. After looking at the list of constituents, I can say that these businesses are among the greatest firms in the world and clearly have a moat. While some of them are attractively valued, such as Meta Platforms Inc. (FB), most of the portfolio seems to be overvalued. Moreover, a higher interest rate in developed markets clearly doesn’t bode well for high PE stocks, which makes the bullish thesis risky in my opinion.

Is This ETF Right for Me?

I have compared below METV’s price performance against the Invesco QQQ ETF (NYSEARCA:QQQ) over the last 9 months to assess which one was a better investment. Over that period, QQQ outperformed BOTZ by over ~23 percentage points. To put METV’s performance into perspective, a $100 investment in this ETF at inception would now be worth ~$73.94, which is a terrible relative and absolute return.

As we do not have much data on METV so far, I think it is hard to assess the fund’s performance over a long period of time. That said, I believe recent months offered a glimpse into how serious METV’s drawdowns can be, both from an absolute and relative perspective, which makes me wonder how volatile this strategy will be going forward.

I personally believe this strategy will remain more volatile than QQQ in the current macro environment, possibly underperforming it in the short term. In the long term, it will all depend and how successful the metaverse will actually be. For the time being, I think a speculator can benefit from the volatility on the short or long side. For long-term investors, I believe call options are a safer alternative to simply buying the underlying stock.

Key Takeaways

The Metaverse is a fast-growing technology, expected to generate attractive returns for investors. At this stage, many well-known companies are entering the race to grow their market share in this niche. METV provides a cost-effective way to get exposure to this sector. The fund trades at over 20x earnings in a market with rising interest rates and high inflation, which makes the bullish thesis risky in my opinion. I believe long-term investors would be better off holding long-term dated call options rather than buying the underlying stock. However, METV might be an excellent pick for speculators hoping to capitalize on the strategy’s volatility in the near future.

About me: Value-oriented investor, seeking low-risk investments with the potential to deliver high returns. I like to analyze ETFs and cash-flow positive businesses that have a moat and growth opportunities.