A Response To Jim Cramer’s ‘Why I’m Against ETFs’

August 01, 2017

With ETFs, investors have choices. Some ETFs, like XRT and others offered by ETF provider SSGA, are equally weighted, meaning they own all stocks in the benchmark index in equal amounts. Others are market-weighted.

Take for instance, the Health Care Select Sector SPDR (XLV), which has a 12% weighting in Johnson & Johnson and a 7% weighting in Pfizer. The Vanguard Information Technology (VGT) has a 14% weighting in Apple and a 10% weighting in Google parent Alphabet. CFRA encourages all investors to determine what’s inside any specific ETF before committing money; our ETF reports help investors do just that.

Not Just A Money-Making Scheme

Cramer attributed the rise in the number of ETFs to the financial services industry looking for a new way to make money; CFRA attributes the rise in assets in ETFs to investors tiring of underperforming active managers.

We think ETF products continue to roll out as investors pull money out of actively managed equity funds and into passive products. In the one-year period ended February, U.S. equity and sector equity passive products gathered $285 billion and $58 billion, respectively. Meanwhile, active peer offerings shed $264 billion and $30 billion, respectively, according to Morningstar.

While low fees play a role in these decisions, CFRA thinks that continued struggles by active managers to keep up with the index has resulted in more investors being comfortable with consistently average returns.

Nothing Wrong With Niche ETFS

Cramer touched on specialty ETFs, citing “wind power” as one investment trend that can be tracked through an ETF.

CFRA thinks Cramer was referring to the First Trust Global Wind Energy ETF (FAN), which has 42 holdings, including Vestas Wind Systems. FAN has $77 million in assets and trades 40,000 shares on a daily basis. We would agree that this is a niche product, but don’t believe such limited trading activity is likely to affect the overall market much.

Cramer also discussed that despite identifying a strong company, listeners have seen stocks decline after being weighed down by other stocks inside an ETF. One such example he highlighted was with stocks inside the PureFunds ISE Cyber Security ETF (HACK).

HACK has gathered just $150 million of new money in 2017, but the performance of top-10 holdings has not gone in the same direction. For example, Palo Alto Networks is down a double-digit percentage thus far in 2017, while fellow HACK holding Symantec is up more than 20%.

CFRA notes that active stock-pickers (professionals or individuals) often fail to keep up with market benchmarks. Index-based ETFs, most of which trade for a modest fee, offer an easy way to get exposure to various indices, from large well-known indices like the S&P 500 as a core holding to much lesser known indices that can be used tactically.

 

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