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‘Hot Sauce’ ETFs Will Thrive Even Without Jim Cramer Funds

There’s plenty of room for unique exchange-traded funds in a world of passive index investing despite the demise of two inspired by the CNBC host.


(Bloomberg Opinion) -- The inverse Jim Cramer exchange-traded fund, which bet against positions recommended by the longtime CNBC host, is shutting down, meeting the same fate as another Tuttle Capital Management ETF that had backed his recommendations. Yet the future remains bright for weird and sometimes hyper-specific investment funds, a key way investors still express themselves in a world overtaken by index investing.

The passive investing revolution, of course, has done wonders for retirement planning, while also leaving a hole in the hearts of risk-seeking investors. The movement that Vanguard Group Inc. founder Jack Bogle started decades ago has meant that most US investors today have access to a variety of broad market index funds at rock-bottom fees, putting the magic of long-term compounding at everyone’s fingertips. That’s a wonderful development that’s helped tens of millions of people to responsibly save for their educations and retirements.

What passive investing purists sometimes miss is that we’re all ultimately human. Index investing isn’t very much fun in the short run, and many investors still need to indulge their taste for risk. Doing so is not some mortal sin, as long as they can afford to absorb the potential downside.

Eric Balchunas, a senior ETF analyst at Bloomberg Intelligence and author of The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions, describes that speculative part of our portfolios as the “hot sauce” to complement the passive core. Hot sauce could even be a healthy component of our portfolios, according to Balchunas, if it helps encourage us to leave the core alone. 

And in recent years, the hot sauce segment has boomed. For instance, the assets of global “thematic ETFs” (which focus on niches such as cloud computing, cannabis or crypto) are up around 148% since late 2019 to about $231 billion, according to data compiled by Bloomberg Intelligence. Granted, interest in risky investments will inevitably ebb and flow with the market (and thematic assets are off their 2021 peak), but Americans’ interest in adrenaline-rush investments and personality stocks is still growing. ETFs focused on such categories as innovation, clean energy, infrastructure, electric cars and AI have added billions in assets since 2019. And entirely new categories have emerged as well, such as space and the future of food.

If it’s excitement that investors seek, the Inverse Cramer Tracker ETF (which will stop trading Feb. 13) wasn’t the place to find it. Because it shorted Cramer’s long positions and went long his shorts, some of the positions offset each other, as with a long-short hedge fund, and ended up being not very thrilling. Balchunas told me that the long-short nature robbed the Cramer fund of its “shiny object” potential. “It should’ve been hot sauce, but it neutralized itself by being long-short,” he says. “It was sauce without the heat.”

Matthew Tuttle, the inverse Cramer fund’s portfolio manager, told me that he generally shares this interpretation. “That’s part of it,” he said. “And a lot of times the success or failure of an ETF just comes down to timing.” 

Since it began trading in March, the fund was effectively short the Magnificent 7 mega-cap growth stocks, which have seen an average total return in the period of about 73%. “This is an environment where that’s extremely tough,” he said. Tuttle added that it was costing him around $17,000 a month to keep the fund running — due to compliance and custody costs, among other things — and that he needed significantly more interest to justify its existence. He’s finding more success in slightly more straightforward products including, for instance, ETFs that provide 200% exposure to Tesla Inc. and Nvidia Corp.

On a recent edition of Bloomberg’s At the Money podcast, Santa Clara University finance professor Meir Statman told host Barry Ritholtz that, in practice, investors aren’t just laser-focused on risk and return. They also get “expressive and emotional” benefits from their investments, in much the same way that we derive some sense of pride from the brand of car that we drive, according to Statman, the author of What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions. Here’s how he put it:

Think about Bitcoin. Sure, people who buy Bitcoin buy it for the returns – high returns. But there is more to it. You know, if you are into Bitcoin, you say “I am young, at least young at heart.” And so you express yourself this way and you get those emotional benefits including perhaps primarily hope that you’re going to strike it rich.

Like any investment or consumer product, some just don’t make it — and that was the case with the Cramer ETFs. To be sure, I suspect that there may well be a point of saturation when the market for “hot sauce” runs out of steam. If you walk into a shoe store and there are a million footwear options, you might get overwhelmed and leave. But my best guess is that we’re nowhere near that point, and the future of weird and exciting investments still looks mighty promising, even if Jim Cramer ETFs aren’t a part of it.

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To contact the author of this story:
Jonathan Levin at [email protected]

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