Morning Coffee With Claude

Spending a little more time trying to figure out AI.

I asked Claude AI for the bearish case against owning Netflix (NFLX). Here's part of the answer.

Market Saturation and Slowing Growth Netflix faces increasing difficulty adding new subscribers in mature markets like North America and Europe. The company has largely exhausted the pool of potential subscribers willing to pay for streaming services in these regions, leading to slower user growth and higher customer acquisition costs.

Intense Competition The streaming landscape has become crowded with well-funded competitors including Disney+, HBO Max, Apple TV+, Amazon Prime Video, and others. This competition fragments viewership, drives up content costs, and makes it harder for Netflix to maintain pricing power. Many competitors can afford to operate streaming services at a loss since they're subsidized by other profitable business lines.

There were also concerns about debt and people getting rid of the service during recessions. What is the bull case in favor of owning Netflix?

Global Streaming Market Leadership Netflix remains the dominant global streaming platform with over 260 million subscribers worldwide. The company has significant first-mover advantages, brand recognition, and operational scale that create competitive moats. Its global reach provides diversification and access to emerging markets where streaming adoption is still growing rapidly.

Content Creation Excellence Netflix has built a sophisticated content production machine that consistently creates popular original programming across multiple genres and languages. Shows like "Stranger Things," "Wednesday," and "Squid Game" demonstrate the company's ability to create global hits that drive subscriber engagement and retention. This original content library becomes increasingly valuable over time.

The total output for the bullish case was longer but not more compelling. As it is with humans, so it goes with AI that the bearish case always sounds more intelligent?

Then I asked it to compare and contrast the iShares Exponential Technologies ETF (XT) with the Technology Sector SPDR (XLK). It said "pondering" for a few seconds before giving an answer.

The final point it made in response to this query was

Performance Considerations

Both funds can benefit from technology sector growth, but their performance drivers differ significantly. XT's performance depends heavily on the adoption and success of exponential technologies, while XLK's performance is more tied to the overall health of established tech giants and their earnings growth.

The choice between them depends on whether you prefer focused exposure to emerging tech themes with global diversification (XT) or concentrated exposure to proven US tech leaders (XLK).

There is legit differentiation between XT and XLK in terms of composition and performance.

Claude did note the difference in volatility between the two, concluding that XT is more volatile. Looking at the chart, it is not obvious to me that XT is more volatile as opposed to lagging badly. Both Portfoliovisualizer and Testfol.io have XLK being more volatile, so I asked about that as a follow up. 

You're absolutely right, and I apologize for the error in my analysis. The data shows XLK is indeed more volatile than XT, which is counterintuitive given the typical assumptions about thematic vs. sector ETFs.

Why XLK is More Volatile Than XT

The higher volatility in XLK likely stems from several factors:

Concentration Risk: XLK is heavily concentrated in a small number of mega-cap stocks. Apple and Microsoft alone often represent over 40% of the fund, with the top 10 holdings typically comprising 60-70% of assets. When these giants move significantly, they create outsized impact on the entire fund's performance.

Market Cap Weighting Effect: XLK's market-cap weighting means that when the largest tech stocks experience dramatic swings - as they frequently do during earnings seasons or market rotations - the fund amplifies these movements. The 2022 tech selloff and subsequent recovery periods would have hit XLK particularly hard due to this concentration.

There was a little more but the above gives you the general idea. For this sort of use, AI isn't necessarily an answer machine, it is a tool to help figure things out. It makes mistakes which doesn't have to be the worst thing in the world as long as you realize it can get things wrong. While I doubt someone else will ask Claude to compare XT and XLK, it won't get the volatility question wrong the next time if someone does ask that same question. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.