Why ETFs can be dangerous for stocks and investors

Investing


The rise of exchange-traded funds has made entire groups of stocks “nothing but chits in a bizarre game of stock market roulette,” CNBC’s Jim Cramer said Thursday.

“The FANG stocks — Facebook, Amazon, Netflix and Google, now Alphabet — are in 10 different ETFs, so on any given day, their movements tend to be driven by the action in the ETFs and not the other way around,” the “Mad Money” host said. “The tail is wagging the dog.”

And, unfortunately, “FANG’s not even the worst of it,” Cramer said. He warned of certain “hidden” ETFs that try to mirror the actions of portfolio managers, using derivative instruments to make bets on professional investors’ bets.

Calling those funds “totally abusive, moronic, horrible,” Cramer said big companies whose stocks appear in those ETFs should bring a case against “ETF peddlers” as a way to solve the potentially harmful trend.

“At the end of the day, these ETFs can be very useful for day traders, but normal investors pay a terrible price because it makes the whole business of stock picking much more difficult, and, … yes, far more futile than it should be,” he said.



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