Why Does Cramer Have a Beef with Leveraged ETFs? 25 comments
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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.
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This article has 25 comments:
Spoiler Alert: He helped bankrupt small investors in droves.
Cramer has once again provided nothing but hot air. In trying to put irrelevant blame on these etfs, his lack of market knowledge is obvious.
Unfortunately, the "American Dream" has become a Nightmare...Mr. Market has had enough...its time to clean up the unscruptuolous corruption that pervades our entire system !!!
Mr. Creamer, here's a challenge for you..lets go Head to Head...you are, without a doubt, one of the best fundalmentalists around.... I will stick with my, "Psychological Analysis" and we'll have some fun with it !!
Who the Hell am I ?? Just a nobody who has a Psych. Degree and 30 years experience as a Broker and Financial Planner...Oh yeah, I'm Canadian too....What do you think..eh ?? Should we put the "Blades" on?
Thanks for a Great Show !!
The Uptick rule needs to be reinstated, which I'm sure will have a negative impact on the short funds. If we want a market that can be invested in, then we need to go back to tilting the odds in the long's favor. That would be much better than the casino we now live in.
An indivdual Investor with a buy and hold mindset, who buys say FSLR totally abhors the ETF that holds it simply because his purchase is subject to the whims of day traders who could not afford to short FSLR but can use the lower priced ETF to accomplish the same thing.
Since, it works both ways, I do not really see what the problem is Over time.
IMHO
btw, just because it is leveraged doesn't mean people only make money from it. People lose twice from it too, so it is ultimately just like another stock, just with a different tag on it. Ban it, and I don't think any instrument in the market is worth investing anymore, simply because the system, ie. SEC, has absolutely integrity to the game it governs.
On Dec 24 09:32 AM aitvaras wrote:
> The problem with ETFs either to the upside or downside is that they
> are baskets of individual stocks. Whatever is in the basket goes
> up or down regardless of whether it is a good stock or a potential
> bankruptcy issue just because it is in the Basket. Most of them are
> very small in Market Cap so exagerated moves occur in individual
> issues.
>
> An indivdual Investor with a buy and hold mindset, who buys say FSLR
> totally abhors the ETF that holds it simply because his purchase
> is subject to the whims of day traders who could not afford to short
> FSLR but can use the lower priced ETF to accomplish the same thing.
>
>
> Since, it works both ways, I do not really see what the problem is
> Over time.
>
> IMHO
had the market not tanked, we'd have heard naught. "as an EDUCATOR", you'd think we'd have been warned of the "bad features" upon their introduction; not after the damage was done.
" it's the script, stupid"-- it' difficult to manage.
Aren't the prices of leveraged instruments like SDS/SSO derived from the underlying index (for example, the S&P 500)? If they are DERIVED from the price of an index, how can buying or selling the leveraged instruments effect the price of the underlying index? It doesn't make sense. They are either dependent on the index (which I believe to be true), or they are independent of the index (which doesn't make sense, but that is what people like Cramer seem to be saying.)
I think you should read the prospectus for the details but my understanding is that for SDS/SSO eg, the long version has a majority in stocks with a minor portion in the index swaps, while the short version is mainly cash with index swaps. So technically, yes, if you buy/sell the long version, you can impact the actual index and hence stock. However, I don't see that being the case for the index swaps. The only case is shorting the long version which IMO is not worth the risk since the reverse exist and shielded from margin related risk. Unless we are talking about naked shorting which should be stamped out anyways, I really feel that there is really no harm done by the etfs themselves.
Besides, investing is technically legalized gambling given the lack of transparencies. Betting on the leveraged etfs is just magnifying your risk and returns. If losing is not part of the game, then why bother having the game in the first place? Cramer should talk more like his age. I worry for the kids watching tv day to day.
On Dec 24 10:33 AM lsimmons wrote:
> If someone could answer this question for me, I would appreciate
> it.
> Aren't the prices of leveraged instruments like SDS/SSO derived from
> the underlying index (for example, the S&P 500)? If they are
> DERIVED from the price of an index, how can buying or selling the
> leveraged instruments effect the price of the underlying index? It
> doesn't make sense. They are either dependent on the index (which
> I believe to be true), or they are independent of the index (which
> doesn't make sense, but that is what people like Cramer seem to be
> saying.)
His rants on the double leveraged ETFs are his latest bag of nonsense. They do exactly what they are advertised to do - twice the inverse on a DAILY basis. The tracking problem is a result of the monster price swings in the underlying, or twice those swings in the Ultras. Look at the results of the double short oil for a very good example.
Why should the "big guys" let the little traders get in on the leveraged bets that they have been using for years? The Crammer is sure against it.
Next, for many years I wanted to short certain sectors as opposed to one stock. The risk of shorting one stock was too high in my mind. In addition, I did not want to even think about the "logistics" of doing it.
What I think is so hypocritical are the Wall Streeters who do not want the great "unwashed" to have access to securities that allow us to easily short the living crap out of the junk they created...like financial companies that cooked up CDO's paid huge "bonuses" on profits that were cooked up and the like. No no....just "buy and hold" you droolers..as we put it to you idiots.
ETF's have allowed a small investor from Oregon (me) to take positions that were completely obvious...like ah...short financial. Guess what, I made money. I made money not listening to the likes of Jim Cramer or any number of Wall Street people who were telling everyone that things were "contained." (Hank Paulson) That the subprime issues were not that bad..and on and on.
Please...this is nothing more than the wolves trying to make sure that the sheep just keeping saying "ba ba...buy and hold...buy and hold."
No thanks. You want to see some real heat just start to do away with these tools.
Short trading is a legitimate and NEEDED trading strategy. Shorts provide the needed counter-punch to "wake-up" the markets and companies who are performing poorly.
Shorts are a positive influence on the financial markets. Short leveraged ETF's are a great way to assume some types of short risks, but without the margin calls associated!
There are no self-respecting hedge funds that use leveraged double inverse etf's to short the market. That entire concept is ludicrous, as any credible market source will tell you.
The nice thing about shorts like SKF is that there is such heavy volume at relatively higher prices and dynamic volatility that precludes control of the security by any single party, unlike many current securities one party or a small group of parties can easily control.
"A BIG ScreeeeeeewYa!!!! to ya Jimbo"