CNBC’s Jim Cramer is often touted as the quintessential alpha-generating machine, provided that investors take a diametrically opposite trade to Cramer’s investment recommendations. In fact, this phenomenon has given rise to several iterations of an “Inverse Cramer ETF,” where investors are promised market-beating performance via a passive investment vehicle. The rationale behind this approach is quite simple: Cramer constitutes the consensus view of the markets, and the consensus rarely generates any alpha – returns that are in excess of the market.
Of course, we’ve continued to note the various instances where Cramer’s recommendations had fallen drastically short. For instance, toward the start of the year, the CNBC star had recommended buying Netflix (NASDAQ:NFLX). With the content streaming stock down over 65 percent so far this year, this recommendation would have proved devastating for any investor buying into Netflix toward the start of the year.
Before going any further, readers should note that various iterations of portfolios that attempt to mimic an Inverse Cramer ETF are haphazardly constructed and cherry-pick Cramer’s recommendations to offer an artificially bloated view of the returns that this strategy might generate. Consequently, in today’s post, we will only deal with the Inverse Cramer ETF offered by Index One, as its fidelity appears to be quite sound.
The Inverse Cramer ETF Continues To Generate Alpha
Index One’s Inverse Cramer ETF is based on the tweets by the Twitter account @CramerTracker.
— Inverse Cramer ETF (Not Jim Cramer) (@CramerTracker) June 2, 2022
Currently, the ETF’s biggest long holdings include GameStop (NYSE:GME), ZIM Integrated Shipping Services (NYSE:ZIM), Lucid Group (NASDAQ:LCID), Corsair Gaming (NASDAQ:CRSR), Wendy’s (NASDAQ:WEN), US Silica Holdings (NYSE:SLCA), AMC Entertainment (NYSE:AMC), and Upstart Holdings (NASDAQ:UPST).
Additionally, the Inverse Cramer ETF also maintains a short position across Logitech International SA (NASDAQ:LOGI), Rockwell Automation (NYSE:ROK), AT&T (NYSE:T), AeroVironment (NASDAQ:AVAV), etc.
This brings us to the crux of the matter. As is evident from the above snippet, Index One’s Inverse Cramer ETF is currently offering a year-to-date return of -5.95 percent. For comparison, the benchmark S&P 500 index is currently down 12.92 percent so far this year. This means that the ETF is beating the broader market by 6.97 percent.
Nonetheless, any investor hoping to cash in on Cramer’s propensity to reflect the consensus view in his stock picks faces substantial real-world challenges. First, the investor would incur hefty trading fees by buying or selling stocks on the fly as Cramer turned bearish or bullish on equities, respectively. Moreover, notice that the Sharpe ratio of Index One’s Inverse Cramer ETF is an atrocious -0.21 on a year-to-date basis. As a refresher, the Sharpe ratio measures the excess return that a portfolio generates, normalized by its volatility. The ETF’s Sharpe ratio of -0.21 suggests that it fails to beat the risk-free rate of return (the return offered by US Treasuries). This means that investors would be better off holding Treasuries instead of reversing Cramer’s recommendations.
To conclude, Jim Cramer can offer valuable insights into the consensus view of the market. Consequently, an Inverse Cramer ETF does carry some utility. However, given the real-world costs involved, religious adherence to this strategy is simply not worth it.
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