ETF Overload

Enough with the ETFs already.

Today's announcement that Claymore Group is launching an exchange-traded fund (ETF) to track stocks with little or no coverage is just the latest in the out-of-control creation of ETFs that's been going on lately. Claymore's also trying to launch an ETF made up of companies where there has been insider buying.

I am not against indexing per se. But these instruments are now taking on all aspects of stupidity. The idea of picking undercovered companies and buying them makes no sense at all. The idea of buying good undercovered companies makes sense. The idea of buying companies where there is insider buying makes no sense. The idea of buying good companies where there is insider buying, well that I can get with.

The proliferation of ETFs has gotten so out of control that I would not be surprised to see an ETF of all ETFs. Or a best-of-ETFs ETF. Or a worst-of-ETFs ETF for those who want to bet that the ugly ducklings are going to become swans. How about an ETF that buys high-performing ETFs and shorts poor-performing ETFs?

How about an ETF that just owns stocks that start with the letter P?

All of these ETFs just serve to confuse people and fake them out of diversifying. The reason I like mutual funds is because they take a diversified approach and allow you to be cushioned against a market decline. Diversification, as I say over and over in Jim Cramer's Real Money: Sane Investing in an Insane World, is the only free lunch.

I have never liked sector funds. I always felt they were for young analysts at mutual funds to cut their teeth on before they get promoted to general mutual funds.

I didn't like them because you put all of your eggs in one basket. The ETF has become the ultimate all-eggs-in-one-basket philosophy coupled with a false sense of security that comes with grouping all sorts of stocks together with a common theme that is predictive of absolutely nothing. In 1998, I did a survey that showed if you bought the stocks with the heaviest insider selling you did the best. That's because they were the best-performing stocks. To set up an ETF on that would be beyond stupid, but I can see one coming so you could short it or go long it.

The creation and proliferation of new product has always been a Wall Street forte, long after we needed new product because new product begets new fees.

Don't believe this industry is some knight in shining armor. The only ETF worth owning is one that is an index fund to a big index for diversification, and if want that I would go with Vanguard's mutual funds: low fees, good execution. Enough said.

Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. Listen to Cramer's RealMoney Radio show on your computer; just click here. Watch Cramer on "Mad Money" at 6 p.m. ET weeknights on CNBC. Click here to order Cramer's latest book, "Real Money: Sane Investing in an Insane World," click here to get his second book, "You Got Screwed!" and click here to order Cramer's autobiography, "Confessions of a Street Addict." While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column by clicking here.

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