360 Degrees: Are ETFs for You?

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.

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 you want that, I would go with Vanguard's mutual funds: low fees, good execution. Enough said.

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Flaws, Yes, But Many Benefits, by Roger Nusbaum

Jim has some fun with the narrow themes that some new ETFs cover, like insider buying and undersponsored stocks.

I also wonder about the merits of the insider-buying ETF, but the back-tested numbers for these things are outstanding.