ETF Onslaught Only Beginning

If you're already tired of ETFs, sorry -- you're not even out of the first inning of this ballgame.

The Stealth Approach

One of the proposed ETFs Cramer dismissed in his July article, the Claymore/Sabrient Stealth ETF (STH Quote), just began trading Thursday. (Disclosure: I serve as the portfolio advisor on multiple unit investment trust products for Claymore, so go ahead and assume I'm favorably predisposed toward this Chicago-based mutual fund firm.)

I have no relationship with Claymore's partner on this product, Sabrient Systems, but I'm familiar with its studies.

This is a highly-regarded quantitative research firm in Santa Barbara, Calif., that does some really interesting work. The Stealth ETF will track Sabrient's already existing index of the same name, which is meant to give investors access to underfollowed companies.

A number of academic studies have found that stocks bought when they have no analyst coverage have generally performed better than stocks that were followed, something that came to be known as the neglected stock effect.

The presumed cause is that once such stocks are "discovered" by Wall Street, this drives prices dramatically higher, rewarding shareholders who got in ahead of the crowd.

Cramer called the idea for an ETF based on this theory stupid, but I would argue that if investors aren't going to gain access to such companies through a vehicle like this, how else are they supposed to find them?

I believe this is suitable to make up part of an investor's small-cap exposure.

To be fair, Cramer's take was more nuanced: He said, "The idea of picking undercovered companies and buying them makes no sense at all. The idea of buying good undercovered companies makes sense."

It might please him to know that the neglected-stock angle is merely used to define the universe of stocks eligible for the index.

Sabrient then employs proprietary analysis methods to identify the companies within that universe that exhibit superior growth potential on a risk-adjusted basis.