Why Does Cramer Have a Beef with Leveraged ETFs?

Includes: SDK, SJH, SJL, SKK
by: Tom Lydon

The ultra short ETF is getting a lot of flack, and the chorus of people speaking against them is growing louder.

Tom Brennon for CNBC says that Jim Cramer has raged against these machines from time to time as well. He says the ETFs are basically taking an investment and turning it into two, meaning, an investment of $5,000 in an ultra short ETF becomes $10,000, and the damage to a certain stock market can be detrimental. Many market insiders feel that this is how the financial systems, in part, got driven to the point of no return.

Where Cramer sees a problem is that these funds are not actual investments, and they are available to all types of investors. They are not buy-and-hold funds because they rebalance daily, and they track the broader changes within the sectors they cover. A slight uptick in volatility can negatively impact these ETFs, into minus returns.

However, in the end, these ETFs are doing exactly what they’re intended to do.

If the SEC were to ban the ultra short ETF entirely, there may be some backlash because the investor base right now is depressed, and many are turning away from long equity positions, and using options and swaps with these special ETFs. Sam Hopkins for Wealth Daily argues that many investors are educating themselves on market trends, and watching daily earnings reports. They are ready to take advantage of the calculated downside benefit by betting against a slew of indexed stocks.

How can Cramer tell people to invest in volatile stocks individually when this is just a tool to give index investors a little bit of leverage?

The fact is, ETF investing might be grabbing some of the limelight that Cramer covets in his promotion of investing in individual stocks. He’ll have little success with this campaign and should consider barking up another tree.