FAQs about the Global X Metaverse Theme Active ETF

By: Edward Chan and Celia Qiu

We have summarized some frequently asked questions on the Global X Metaverse Theme Active ETF and will share our thoughts in this article.

How Is It Differentiated from Peer Funds?
We recognize the challenge of investing in the Metaverse – an industry that’s still in its early stages and without a well-defined scope. In order to create a basket of the most relevant and innovative global companies who are beneficiaries under the structural growth trends of the Metaverse, we’ve conducted deep industry research to categorize companies into four different sub-sectors according to our in-house definitions, namely

Metaverse Technology
Metaverse Platforms
Metaverse Devices
Data Processing

As a result, we have a better understanding of the building blocks of the Metaverse and we ensure the relevant companies are included in our portfolio.

Other differentiations are:

We do not hold any consumer discretionary names while peers, on average, hold around 10% in the sector.
We are more diversified across countries, with US exposure at 57% compared to the peer average of 75%.
We invest in downstream virtual reality (VR) original equipment manufacturers (OEM), which will benefit from the ramp-up of VR and augmented reality (AR) devices.
We are able to construct a more concentrated portfolio with 23 holdings versus a peer average of 40 names, as we have high conviction in our stock picks backed by a rigorous research process.

What is The Country Allocation of the Portfolio?
As of April 2022, the country allocation is approximately US (50%), China (16%), Korea (10%), Taiwan (9%), and Japan (2%). US companies have the largest weight mainly because of their full exposure to the technology stack required for the Metaverse, including semiconductors, operating systems, software tools, platforms, and content. Many US companies are already market leaders in their relevant technology categories and are therefore well-positioned to benefit from the trend. The majority of US internet and hardware conglomerates have also announced plans to invest in Metaverse-related initiatives.

China ranks second, given its large internet user base and tech giants with cutting-edge technology and content. For example, Chinese online gaming and video platforms are strongly competitive globally with high-quality gaming and video content (either professionally-generated or user-generated). This is a significant advantage as VR, gaming, and social media could be some of the early applications for the Metaverse.

What Are the Sub-Categories?
We classify the Metaverse-related companies into four categories:

Metaverse Technology – Companies that are involved in the provision of technologies or infrastructure used to develop or operate the Metaverse. Examples include VR/AR, blockchain and non-fungible tokens (NFTs), and digital payments. Key companies in our portfolio include Nvidia, Unity Technology, Autodesk, Coinbase, etc.
Metaverse Platforms – Companies engaged in the provision of content, such as online games, concerts, educational programs, or workout trainings, through a non-physical, virtual environment where users and businesses can interact through various kinds of virtual technologies. Key companies in our portfolio include Facebook (Meta), Tencent, Roblox, NAVER, etc.
Data Processing – Companies involved in providing computing power to support the Metaverse. This includes high-intensity data processing services such as rendering, data matching, and synchronization, or motion capturing. Key companies in our portfolio include Microsoft, TSMC, AMD, Qualcomm, etc.
Metaverse Devices – Companies involved in the provision of devices used to access or interact with the Metaverse. This includes the production of wearable devices, audio and sensory equipment, or gaming equipment. Key companies in our portfolio include Apple, Goertek, Sunny Optical, etc.

Why Do You Invest in Tencent and NetEase When the Chinese Regulatory Environment Appears Less Favourable Towards the Metaverse?
Tencent has a lot of the technology and know-how building blocks to explore and develop the Metaverse. In addition, Tencent’s WeChat has approximately 1.3 billion monthly active users (the company reported data as of 4Q21). Leveraging its experience in incubating social media supper apps and its strong game development capabilities, Tencent is well-positioned to develop a gamified social network and support many more programmable experiences. For example, the company is currently testing an application of Unreal Engine in the Super QQ Show, which allows users to customize and dress up their 3D virtual avatars for use in various social scenarios.

NetEase has developed many successful massive multiplayer online role-playing games (MMORPG) with long lifespans. MMORPG games can be seen as pre-mature Metaverse-like virtual worlds where gamers can socialize, play, and earn virtual assets like hero skins, weapons, and game currencies. As a result, the company is well-prepared to develop relevant content as the online gaming industry continues to evolve. In December 2021, NetEase entered into a strategic agreement with the municipal government of Sanya on Hainan Island to build a new headquarter in the city. The office will be dedicated to constructing an industrial base for the emerging Metaverse theme.

Why Do You Hold TSMC?
Migration in semiconductor technology will allow companies to design faster chips with lower power consumption and higher transistor density. This is crucial for high-performance graphics on portable devices. VR/AR workloads are challenging given they are compute-intensive, complex concurrencies, and real-time. TSMC is leading the foundry process node migration. The company is the key manufacturing partner for semiconductors used to drive the Metaverse. TSMC supports 1) VR system-on-a-chip (SoC) fabless companies like Qualcomm, and 2) data center fabless companies like Nvidia and AMD.

Why Do You Invest in Korean Entertainment Agencies Like HYBE?
Korean entertainment companies are also actively investing in Metaverse-related technology and NFTs that could utilize the growing worldwide influence of K-pop artists and their intellectual property (IP) to create new and stable sources of income.

HYBE, the agency of globally popular K-pop group BTS, will be able to turn its fandom platform onto the Metaverse, utilizing the IP of artists as NFTs. Companies like JYP Entertainment have also joined hands with Dunamu, a blockchain company, to launch an NFT platform business utilizing artists’ IPs. SM Entertainment has proposed the creation of a Metaverse platform where various types of independent IPs such as music, music video, and performance, can be connected to each other.

What Is the Relationship Between Metaverse and Cryptocurrency Stocks Like Coinbase?
Blockchain technology is the key building block of the Metaverse. We believe many applications in the Metaverse will be decentralized. For example, decentralized finance (DeFi) is one of the earliest applications of the blockchain. DeFi currently has the largest user base per decentralized application (DApp) and the highest volume traded across the industry (State of the DApps, 2021). Coinbase facilitates retail and institutional trading of crypto assets. The company offers a suite of services and products around crypto, directly integrating with blockchain protocols.

Why Do You Invest in Cyber Security Companies?
In the Metaverse, digital assets are becoming more valuable as people spend more time in the virtual worlds. More specifically, NFTs will be at the heart of the Metaverse economy. This raises the likelihood of an increase in NFT fraud. The appreciation of cryptocurrencies has also led to phishing activities or hacking on crypto accounts. Some documented scams that have already taken place include malicious smart contracts where the victim is fooled into authorising a transaction where they give the malicious actor full access to their crypto wallet, losing all of their tokens and cryptocurrency.

The Metaverse works by connecting many technologies, which increases data sharing like never before. That’s enough to say that there will be a massive increase in attack surface. Moreover, as users leave data trails around the Metaverse, one major problem in the real world may also cross into the virtual reality world — the invasion of user privacy by tech companies.

Last but not least, virtual identity could also become vulnerable and exposed to attacks. Virtual identity being stolen means that users will be the victim of hacked avatars, and the manipulated digital identities could conduct serious cybercrimes.

Disclaimer

This document contains the opinions of Mirae Asset Global Investments (Hong Kong) Limited (“MAGIHK”) and is intended for your use only.

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