[Editor's Note: This article originally appeared here on March 23, 2017. Click here to watch Jim Cramer's July 28, 2017 critique of ETFs.]
Todd Rosenbluth is director of ETF and mutual fund research at CFRA.
On Jim Cramer’s CNBC Mad Money Show Tuesday night, he spoke passionately against the use of ETFs.
While CFRA believes investors have a variety of strong investment opportunities to consider, we contend that lower-cost ETFs can be helpful to reduce risks and provide liquid exposure to a variety of trends. Our approach focuses on the holdings and leverages our stock research capabilities. Below we recap Cramer’s take, and offer our perspective.
Cramer cited the “hideous” number of ETFs that have been launched in recent years, and noted that ETFs can be used to short stocks that you, the individual investor, may have in your portfolio.
CFRA notes 432 equity ETFs launched since March 1, 2014, in addition to 2,047 mutual fund share classes.
Financial advisors, ETF providers and CFRA regularly tout the diversification benefits available via ETFs and mutual funds. They also note that ETFs can be a good way to get tactical sector exposure without relying on just one stock.
Cramer questioned ETFs’ diversification benefits, noting that even an ETF could own a stock like Enron, which subsequently went bankrupt due to corrupt accounting. He advised his listeners to buy a stock because it is the best in a sector that is growing, and avoid ETFs that would also include other “mediocre” names that could potentially drag down the returns.
ETFs Can Limit Single-Stock Fallout
CFRA has a different take. While the diversification benefits of ETFs will not prevent an investor from getting caught up in fraudulent accounting, it will limit the damage when a stock falls out of favor.
For example, Sears declined sharply this week after acknowledging that bankruptcy risk looms large. Investors who owned Sears through an ETF like the SPDR S&P Retail ETF (XRT) were protected by the ETF’s stakes in Amazon, Netflix, Walmart and other retailers with stronger fundamentals.