It can be simple and straightforward
In resources, for example, the theme is very easy to spot. Even if the ETF issuer needs to construct an index to track (which they don’t in this example), knowing what is a resource stock and what is not is simple, and so investors get what it says on the sticker.
Even if we go a bit wider, the Lithium and Battery ETF we covered recently has clear links and profit drivers for lithium mining and battery production. The companies included may not be the big winners in the space and some may even go bust, but at least you are invested in the theme you decided could be a winner.
But there’s often a problem.
Or it can be nuanced and diverse
There are more nuanced themes that are either difficult to truly capture, or they are so diverse that there’s no company that operates exclusively in this space. This is especially true when trying to capture emerging themes such as the much talked about Metaverse.
Global X ETFs have issued a Metaverse ETF (NASDAQ code: VR) which perfectly captures my concerns.
Below are its Top 10 holdings.
Nvidia makes GPUs and chips that certainly will be in demand in a Metaverse, but they’re already in demand for gamers, crypto miners and everybody who owns a computing device. Will the Metaverse increase demand? Certainly. But is it a Metaverse company?
No. They are a diverse technology company already benefiting from our increased use of technology.
Roblox is an interactive online game mostly for kids. You can imagine how in time they could pivot to the Metaverse. But this raises a bunch of questions and risks. Will they pivot and will it succeed? Will they even be around when the Metaverse really arrives at some unknown date in the future? Or will a competitor eat their lunch long before we’re all traipsing through the Metaverse?
Coinbase is included because it’s assumed some sort of crypto (new or existing) will be needed for payments and transactions in the Metaverse. But is that really going to be a game changer for Coinbase? Will Coinbase still be a dominant crypto exchange in the decades ahead?
Meta Platforms are going big on the Metaverse, spending tens of billions and of course, they already have the Oculus VR headset. But right now they make money off Facebook and Instagram advertising. They’re taking a big bet and their lofty plans to be a serious player in the Metaverse may never come about.
So all the stocks certainly have potential. But is an investment in this Metaverse ETF really making you money from companies in the Metaverse, or who may make a majority of their profits from the Metaverse?
The answer is no.
At this point, you’re buying hopes or promises – or maybe it’s just electric dreams. What you’re not buying is an ETF that really bets on the Metaverse, in large part because it’s some way off and nobody knows how it will eventually work.
Ease your FOMO
But don’t worry, when the Metaverse starts to emerge and gain traction there will be plenty of time to invest in companies that really do profit from the Metaverse. Being early here frankly means throwing money at vague ideas dreamt up in ETF issuer boardrooms that will make them money but not necessarily make you any money.
So where to from here?
For me the solution is easy: I stay away from these fancy-themed ETFs unless there is a very clear understanding of a.) how the stocks included actually benefit the theme, and b.) when profits really are being driven by the theme. Take the global infrastructure ETF for example – it’s a good, themed ETF that works.
But say you want exposure to a theme such as the Metaverse, your best bet right now is to simply buy a tech-focused ETF because that’s what the Metaverse will be: technology heavy.
The last word
I’ve used an extreme example in this article – the Metaverse. But the logic remains. So consider the above whenever you’re looking at a theme-based ETF, and ask the hard questions: Is the ETF really benefiting from the theme, or is it just cashing in on FOMO? And look around for other ways to catch the trend. But most importantly – avoid the FOMO.
At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.