Exchange-traded funds, better known as ETFs, have seen a surge in popularity recently, but Jim Cramer is not as taken with the trend as the rest of the market.
Proponents argue that ETFs guard against “single-stock risk,” or the damage an individual stock could do to your portfolio. They say it lets you play an entire sector rather than putting all your money on one potentially bad stock.
But Cramer doesn’t buy that argument. “You want to be in a stock because it’s the best name in a sector that’s growing. You don’t want to be in a group of mediocre stocks that will pull down the high-quality stock you’ve chosen,” the “Mad Money” host said.
Cramer believes “ETF-ization” happened because people shied away from individual stocks, which all but lost their appeal before optimism about President Donald Trump’s policies fueled a further rise the bull market beginning in November.
Yet owning an ETF does not automatically guarantee profits or safety from broader market trends, despite the number of ETFs set up to take advantage of them.
“If you think you can’t pick the best of these stocks, then I would suggest that you might not know enough about the sector to begin with, so don’t think you can outsmart it by picking an ETF,” Cramer said.
The “Mad Money” host made an exception for GLD, an ETF that tracks the price of gold, because of its accuracy.
On a larger scale, however, Cramer said that ETFs have the power to distort stock valuations too dramatically for his liking.
“At the end of the day, I’m against ETFs because they often create enormous distortions that can obliterate even the best of stocks,” Cramer said. “You have to accept a lot more risk if you own a stock that’s particularly hostage [to] a given ETF.”