Park's Recreation: How to Invest in Movie Studios

If you want to invest in movie studios, you probably wan to start with entertainment ETFs.

Every time I go to the movies to see a big blockbuster film I wonder who owns these companies. You know that Disney and Sony and all those guys are publicly traded companies. But who are their stockholders? They say the most expensive companies in the world are owned by large mutual fund investors, private pension plans, and such. So how do you get a piece of that action if you are not a millionaire?

I finally learned the secret! It's as simple as investing in an Exchange Traded Fund, or an ETF as they are called. These are the automated mutual funds that follow popular stock indexes. And as luck would have it there are several ETFs that invest in the entertainment sector.

The stock market uses a very broad meaning for "entertainment". I found this article from 2016 that recommends four entertainment oriented ETFs. I can't vouch for their choices but I'm thinking about investing in some of these guys.

How Does an ETF Work?

The first question you might have is what is the difference between an ETF and a regular mutual fund. I don't know all the details but two criteria that stand out for me are:

The ETF is automatically managed by computer (no fund manager)
The ETF follows a pre-determined index or sector

All the articles I read about ETFs say they have lower administrative fees, which is an important point for investors. You have to make a lot of money from a mutual fund to pay for its high admin fees.

How you get into the fund depends on how you invest. You may have to pay a brokerage fee every time you buy shares in the fund. But once you're in you can have the dividends reinvest automatically. Over time the dividends compound.

Mutual funds are like stocks, too. Their share prices can increase over time and a mutual fund might issue a share split. So you can make money by selling shares after the price increases. Just remember you have to pay taxes on your profits.

How Do You Know the Value of an ETF?

If you look at the last 5-10 years of history for a stock or mutual fund you can see if the share price has grown over time. If the stock or mutual fund pays dividends then looking up that dividend history can tell you something, too.

Investors look at the Dividend Yield. The higher this percentage is the better. You won't find many Yields computed above 5% but there are a few. Most seem to fall in the 1% to 4% range. But if a stock never pays a dividend then it's Yield is 0%.

So if there is growth in the share price, consistent dividends, and maybe even some growth in the dividend over time then the ETF is probably a safe investment. But the safer the investment the less risk it takes, and the less risk your investments represent the less likely they will "beat the market" for growth in value.

Dividend Yield percentages can change over time so take any quote you see with a grain of salt.

It's a tradeoff no matter how you look at it.

Here are the four funds mentioned in that article I linked to above.

PowerShares Dynamic Leisure & Entertainment ETF (PEJ)

This is a diverse fund with a complex valuation. I don't think I would invest in it. The Yield is 0.63%, which happens to be the same as the administrative cost (aka "expense ratio"). So I guess you'll only make money as the share prices increase, and if the fund splits its shares for any reason.

You can study the history of the PEJ fund on Yahoo Finance. You'll also see the current price there and if you scroll down you'll see some recent news stories.

This fund includes Disney among the companies it follows but I'm not interested in Expedia, Delta Air Lines, or Carnival.

PowerShares Dynamic Media Portfolio (PBS)

This fund invests in companies like Facebook, Disney, Sirius XM, and Twenty-first Century Fox. Disney just bought most of Fox so I don't know how that all works out.

The Yield in 2016 was 0.79%, slightly better than the expense ratio of 0.62%. Investors look for growth in share price on this fund.

Study the history of the PBS fund on Yahoo Finance.

Market Vectors Gaming ETF (BJK)

It looks like this fund invests in casinos and resorts. Not really what I am interested in.

The Dividend Yield is 5.83% and the expense ratio is 0.65% so not so bad. The annualized return is pretty low compared to those first two funds above.

Study the history of the BJK fund on Yahoo Finance.

Consumer Discretionary Select Sector SPDR Fund (XLY)

I think this must be the granddaddy of the entertainment world ETFs. This is the one I'm saving up for. It's also the most expensive of these four mutual funds.

In 2016 the expense ratio was an incredible 0.14% and the dividend Yield was a respectable 1.33%. The five-year annualized return was the highest of these four funds.

This fund invests in companies like Amazon, Home Depot, Disney, and McDonald's. Also, you've only got 2 major studios in that example group but this fund is doing very well.

Study the history of XLY on Yahoo Finance.