What Netflix can teach us about ETFs
There was a time, not all that long ago, when watching a film required a degree of planning. You chose in advance, travelled to collect it and returned it when you were done. Those over a certain age will remember this as the Blockbuster era. The arrival of the DVD improved things, bringing cinema into the home with a level of control that had not previously existed. But even that, in retrospect, was cumbersome.
Streaming changed the experience entirely. Netflix and the like made content immediate, continuous and accessible.
Investing on-demand
It struck me the other day that something similar has been happening in financial markets. Exchange-traded funds, or ETFs, are often described in terms of cost or convenience, but they also represent a shift in how investors access markets.
For decades, traditional mutual funds were the default way to gain diversified exposure. In the same way as DVDs were an effective distribution technology in their time, mutual funds remain an effective structure. But they operate on a batch process: orders are placed during the day and executed at a single price after markets close. Investors know what they have bought, but only in hindsight do they find out the strike price.
The system works to an extent, but it was due an upgrade.
ETFs, by contrast, trade on exchange throughout the day. Prices are visible in real time, meaning investors can buy and sell when they choose rather than waiting for an end-of-day calculation. In that sense, the analogy to streaming is apt. The experience is more continuous, more flexible and more aligned with the expectations of a world that has grown accustomed to binge-like immediacy.
It is, of course, tempting to conclude that this makes ETFs categorically ‘better’. This is too simplistic. DVDs did not become obsolete because the films they carried were inferior. Instead, they were overtaken because the way people wanted to access those films had changed. Echoing this, the underlying investments inside an ETF are often identical to those held in other structures. It is just the mechanism through which investors interact with them that has changed.
Behind the play button
Importantly, that mechanism rests on a set of innovations that are largely invisible to the end user. When an investor buys an ETF, the transaction appears straightforward: a price, a trade and a confirmation. Yet behind that simplicity sits a network of participants working continuously to keep the system functioning as intended.
Market makers provide ongoing buy and sell prices, ensuring that investors can transact without needing to find a natural counterparty. Authorised participants (typically large financial institutions) create or redeem ETF shares in sizeable blocks, exchanging baskets of underlying securities for new ETF units, or vice versa. This process allows the supply of ETF shares to expand or contract in response to demand.
The result is a structure in which the price of an ETF is anchored, over time, to the value of the assets it holds. If the market price drifts too far above or below that value, it creates an opportunity for arbitrage. In acting on that opportunity, market participants help bring the price back into line. This mechanism has been a central reason why ETFs have been able to scale so rapidly.
The depth behind the display
Liquidity, too, looks different when viewed through this lens. In a traditional fund, liquidity is largely a function of the fund itself. In an ETF, it is layered. There is the liquidity visible on the exchange screen, but also the capacity of market makers to facilitate larger trades, and the liquidity of the underlying securities that can be assembled or disassembled through the creation and redemption process. The key here is that what might appear thin in liquidity terms on the surface can, in practice, be deeper than it first seems.
The fundamental question at the heart of investing stays the same – i.e., what to own, when and why? ETFs are just product wrappers and so provide a way of expressing the answer, but cannot give the answer itself.
Just as streaming platforms host everything from classic films to new releases, the ETF structure is neutral as to the content it carries. A broad equity index, a factor-based strategy or an actively managed portfolio can all be delivered through an ETF wrapper.
In our view, that neutrality is increasingly important as the ETF market evolves. While index-tracking products still dominate, active ETFs are growing in prominence. Here, the distinction between content and delivery is becoming clearer still. The investment process, whether fundamental, systematic or a blend of both, remains the source of differentiation.
Greater transparency allows for greater oversight of what is owned. Intraday trading introduces flexibility, but also requires discipline in how it is used. Lower headline costs are attractive, but total cost of ownership still depends on factors such as trading spreads and market conditions.
Markets meet streaming
The comparison with streaming is also about the steady evolution of infrastructure. Markets have become more electronic, more connected and more transparent. Investors expect to see prices, to act on them and to understand what sits behind them. ETFs sit comfortably within that world.
In the end, the lesson from Netflix is simple. When access improves, behaviour follows. Investors adapt to the tools available to them, just as viewers adapted to streaming. The films did not change, but the way people watched them did. We consider ETFs to be part of the same story.
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