Cramer's Got It Wrong on ETFs

Using the industrials as an example, I want to be equal weight compared to the S&P 500, and for me, the best mix is four common stocks and the PowerShares Water ETF (PHO). In the financial sector, I prefer five stocks and no ETFs and for telecom, one stock and one ETF.

You can be poorly diversified with any mix of products just as you can be well diversified with any mix of products.

A consistent theme in my coverage of new and existing ETFs is exploring whether a given fund could be a better way to access a certain part of the market. Most times, in my opinion, an ETF is not the single best way to capture a sector or country, but sometimes it is. Idly dismissing every fund that exists is probably a mistake for most do-it-yourselfers.

However an investor builds his portfolio, it is logical to consider multiple products to build the result. In general, ETFs are cheaper and much more transparent than traditional mutual funds. ETFs also offer a way to avoid single-stock risk in those market segments in which it might be difficult to take single-stock risk. A couple of examples that come to mind are biotech and Malaysia.

Jim also likes to pick on the Oil Services HOLDR (OIH) as being manipulated. Although I suppose this could be true, I don't believe it matters if it really is or not. If you think it is, then you should stay away; other ETFs provide energy sector exposure after all.

Assuming Jim is right about OIH being manipulated, that would, obviously, be a negative. All funds have positives and negatives, and if a fund has too many negatives, regardless of what they are, you should not buy it.

I will readily concede that some funds seem gimmicky and questionable. But just because they seem so does not mean they are. Last April, First Trust listed its IPOX-100 Index Fund (FPX). An IPO ETF has all the makings of a gimmick, but as I pointed out last April, it looks to me like it has a high correlation to the iShares Russell 2000 Growth Fund (IWO) with the potential to outperform IWO.

That is, in fact, what the fund has done. Any investor who would buy a small-cap growth fund should probably spend time studying FPX as part of his investment selection process. This sort of secondary effect is present in many funds that some might dismiss as gimmicky, and although you won't need most of them, you should consider some of them.

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