Inverse Cramer? The madness of modern Thematic ETFs 

I missed the good old days when John "Jack" Bogle descended from his throne at Vanguard to gift us, humble retail investors, with the Vanguard S&P 500 Index Fund (VFINX). Back in those days, low-cost investment for tracking the most well-known index was considered revolutionary and highly disruptive to the traditional fund management industry. 

Fast forward to today, where we have Thematic ETFs covering every market niche (my favourite is the very appropriately named COW, otherwise known as the iShares Global Agriculture Index ETF), and "maverick" fund managers like Cathie Wood sinking her ARK ETFs (no pun intended) as high-valuation tech growth stocks melted down amid rising interest rates. 

Earlier this year, our writers bought you the BECKY ETF, a hypothetical fund tracking the stocks of 10 companies loved by upper-middle-class American white girls (which unsurprisingly outperformed the market when backtested). Yesterday, I learned that a fund manager out there offered an inverse ARK ETF posting a 69% YTD return. Today, I bring you something that potentially tops both: the inverse Cramer ETF. 

Inversing Cramer

Here's a crash course for those unfamiliar with who Jim Cramer is. He's a former hedge fund manager turned television personality, known for his over-the-top antics and segments as CNBC's Mad Money host. He is also the co-founder of TheStreet.com, where he contributes articles and plays a role in their quant ratings. 

He's also a very prolific stock picker, as seen by these tweets that have aged oh so well. Naturally, a movement began online (on Reddit and Twitter – looking at you r/WallStreetBets) about the prospect of "inversing Cramer" – i.e. doing the opposite of what he recommends. If Cramer says to sell a particular stock, you buy. If he says to buy, you sell. Pretty simple right?

How an inverse Cramer index would work

Index One provides a publicly available page tracking the performance of a basket of long and short Cramer stock picks. Their most recent list of holdings comes from the Inverse Cramer ETF Twitter account (@InverseCramer).

Obviously, this hypothetical inverse Cramer ETF (I'll be calling it IJC from now on) would be actively managed. Whoever is unlucky enough to be the portfolio manager will have to buy and sell holdings on the fly as Cramer pushes out new recommendations. This would likely keep expense ratios high. To obtain inverse exposure, the fund will also need to short stocks (or buy put options or total return swaps). 

How has an inverse Cramer index performed?

$IJC hasn't been live for too long, so performance is limited to a short-term backtest. That being said, the results are…disappointing.

Year-to-date, the total return sits at -15.66%, with a standard deviation of 24.21%. Although the time period is too short for any meaningful analysis, it is amusing that the current Sharpe ratio for IJC is 0.65 (translation: a terrible risk-adjusted return). 

Funnily enough, $IJC has outperformed the S&P 500 Index ($SPX) on a YTD basis, given that the latter is down over -17% at the time of writing. 

If you went through the trouble of inversing every Cramer stock recommendation, you would've been rewarded with about 1.44% better performance compared to some bloke mindlessly holding an index fund. Another strong win for actively managed funds!

Why inverse Cramer?

I see the inverse Cramer hype as symptomatic of a Gen Z retail investing demographic that started buying stocks during the low-interest rate environment of 2018 – 2021. Until now, their risk tolerance hasn't really been tested (the V-Shaped COVID crash doesn't count, the Plunge Protection Team saw to that). 

Investors piled capital into niche thematic funds promising "the next paradigm" and "disruption" Cathie Wood outperformed the NASDAQ 100 during this time by claiming to be investing in "innovation" while buying stocks like Zoom (ZM), Peloton (PTON), Roku (ROKU) and Teladoc (TDOC). 

Fast forward to today, where retail is in full capitulation and the only things green are I-Bonds, T-Bills, Berkshire Hathaway (BRK.B), and commodities. Still, the urge to do something, to be creative, to be disruptive has led the crowd full circle to inversing Jim Cramer! While hilarious, it is not a legitimate long-term strategy nor a form of prudent risk management. 

A better idea would have been to inverse themselves– by fighting the urge to buy speculative funds and invest in a low-cost, globally diversified index fund like Vanguard's Total World Stock ETF (VT), making regular contributions, and staying the course when markets get rough. 

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