Watch Out for ETF Misinformation

The author's case against OTP is that "most of its portfolio, including firms like General Electric(GE Quote - Cramer on GE - Stock Picks) and 3M(MMM Quote - Cramer on MMM - Stock Picks), can also be found in cheaper funds." The question is implied: So why not own the cheaper funds?

Well, because despite OTP's expense, it has delivered as advertised in its very short time on the market. While two months is not enough time to make anyone believe that OTP has thoroughly proven itself, it sure shows that investors who paid a little extra for a superior large-cap growth mousetrap have gotten their money's worth so far.

Smart Indexing

Next I've got to counter the article's point that ETFs that own the same 500 stocks -- as in S&P 500-based ETFs -- with different methodologies will deviate by only a percentage point or two, so it doesn't matter which one you choose. Here, Robert Arnott's fundamental index is mentioned but not his fund, the PowerShares FTSE RAFI US 1000 Portfolio(PRF Quote - Cramer on PRF - Stock Picks), and there is specific mention of the Rydex S&P Equal Weight ETF(RSP Quote - Cramer on RSP - Stock Picks): "In the end, regardless of which ETF you pick, you will own the same companies and get the same relative performance within a percentage point or two of each other."

The history of Arnott's fund and RSP vs. the S&P 500 speaks for itself. Anything could happen with returns in the future, but up to this point, methodology has mattered.

Since inception, PRF has beaten the S&P 500 by roughly 6%. In that same time period, RSP has beaten the S&P 500-tracking SPDRs(SPY Quote - Cramer on SPY - Stock Picks) by 3%.

It's too early to know whether PRF can keep up this outperformance. But it is worth noting that since RSP's inception in 2003, it's up a total of 90%, compared with not quite 60% for the S&P 500. This dispersion is clearly attributable to RSP's much smaller market cap, and there will be periods when SPY leads, but the notion put forth in the article that which broad index fund you invest in doesn't matter is completely upside down.

Not Kooky, Complex

The SmartMoney article brings it home with a general condemnation of narrow-based ETFs, saying these new and original ETFs can be so hard to understand, it's almost not worth the effort to decide whether to buy (and that you should wait to judge them on past performance, which I'll get to in a minute). It even says that many unnecessarily slice and dice the market into segments not worth investing in, and uses a pejorative tone (the aforementioned desperation of ETF companies) that implies these instruments are gimmicks.

This conclusion reveals a lack of understanding. The Claymore/Sabrient Stealth ETF(STH Quote - Cramer on STH - Stock Picks) gets singled out as an example of all of the above faults. But a quick peek under its hood shows STH has a secondary effect (as do most of the "gimmick" funds) that is far from far-fetched.

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