‘The ETF Story’ A Natural For Netflix

Back in the early 2000s, I received an interesting package while working as business editor for the Oakland Tribune and the Bay Area News Group. Inside was a DVD and a return envelope to a company I had never heard of: Netflix.

The introductory letter asked simply to “watch this and return it in the envelope and we will send you another” or something to that effect. Boy oh boy, do I wish I’d saved that historic PR pitch. I don’t remember the movie they sent, but I sent it back and signed up for this DVD-by-mail service that was becoming enabled by the internet. I never went into a video store again.

Netflix disrupted not just the at-home entertainment business, but today it’s challenging Hollywood like never before on many different levels: programming, streaming, executive poaching … name it and Netflix is fighting and beating the old guard. And there’s much backlash from that gray line.

The company has disrupted at such a high level, because of consumer preference, that it’s often painted as a problem, much as some do with Amazon, and many on Wall Street do with ETFs.

‘Untenable Model’

I recently came across this Netflix rant in TheVerge.com:

Christopher Nolan, director of high-concept blockbusters like the current “The Dark Knight,” “Inception,” and “Interstellar,” and famous defender of the old-school institutions of film, went on a bit of an anti-Netflix rant during an interview with IndieWire today.

“Netflix has a bizarre aversion to supporting theatrical films,” he told IndieWire’s Eric Kohn. “They have this mindless policy of everything having to be simultaneously streamed and released, which is obviously an untenable model for theatrical presentation.”

So Netflix doesn’t fit Nolan’s business model? Ah yes! I never go to a movie theater anymore; I would prefer to stream it, or watch it on HBO … in my house. It’s a beautiful thing. No crowded parking lots or ticket lines or people talking during the movie. Thanks to technology, that ship has sailed for me.

‘The ETF Swamp Thing’

As the U.S. ETF industry gets ready to break yet another annual record of asset inflows less than eight months into the year—we’re right up against the $287.5 billion mark—a similar Netflix-like disdain of ETF success and disruption is creating bogeyman scenarios.

Granted, these “ETFs look boring but are scary” and “index investing is evil” always pop up, but with this year’s undeniable success ETFs are enjoying, I’d expect a little bit more love.

From the Financial Times’ “ETFs are scary” story on Wednesday:

“ETFs do not usually attract much attention, since the sector — yet again — seems geeky and dull. But they have profound consequences … the key point is this: if we want to avoid a replay of 2007, we must keep questioning our assumptions — and peering at the parts of the system that seem ‘boring,’ ‘geeky’ and ‘dull.’”

Not quite sure what “profound consequence” we should fear from the $9.5 billion Schwab U.S. Broad Market ETF (SCHB) offering investors a broad market fund of 2,500 of the largest U.S. stocks for 0.03% a year in expense ratio. Passive investing isn’t going to climb out of the swamp and eat you like an alternative active mutual fund would.

Also on Wednesday, The Atlantic painted an “evil” picture of indexing, with this beauty of a headline:

Are Index Funds Evil?

... Over the past year or two, a growing chorus of experts has begun to argue that index funds and shareholder diversification are strangling the economy, and need to be stopped. That’s the maximalist claim, anyway, and it is a strain of thinking that is spreading with surprising speed.”

Neither story quotes an investor who has benefited from not paying 2% a year for a product they can get for 0.03%. Worse yet, none talk about all the investors who are no longer overpaying for underperformance.

The Financial Times and The Atlantic aren’t the only ones sounding the alarms. There were a few other high-profile, anti-ETF-indexing screeds over the past few days. The sentiment is real. For every “US ETFs See Record Inflows” story, there’s a horror scenario to counter it.

Investors are being scared off because the financial services industry is under a massive transformation. Stock picking is the walking dead. And change can be scary, if not flat-out threatening. But the ones who are truly scared are those who won’t offer their clients ETFs or the cheapest index products out there.

The story of ETFs would make a good series on Netflix.

At the time of writing, the author held no positions in SCHB. Drew Voros can be reached at [email protected].