The Inverse Cramer ETF might soon be a thing

Need a hedge against Jim Cramer? Going by the SEC filing that landed on Wednesday evening, it might soon be possible.

Tuttle Capital Management has filed to launch two exchange traded funds that trade on the stock tips of the CNBC personality and Alphaville reader, one that goes long and one that goes short. The mooted tickers are LJIM and SJIM.

The concept is similar to Tuttle’s inverse-ARK ETF, which is now a $343mn fund that has gained 56 per cent this year by betting against Cathie Wood’s flagship investment vehicle.

It’s a well-worn joke that Jim Cramer should have his own inverse ETF. (By our estimation it rivals a “long Paul Pelosi ETF” as the most discussed fantasy launch.) But while ARK reveals its positions daily, Cramer’s disclosure method owes more to stream-of-consciousness. That means high churn and constant monitoring.

Tuttle’s filing doesn’t set out operating expenses, nor does it define whether the duty of watching Mad Money will be human-powered or automated. Here’s what it does say about how the inverse ETF would work:

The Fund is an actively managed exchange traded fund that seeks to achieve its investment objective by engaging in transactions designed to perform the opposite of the return of the investments recommended by television personality Jim Cramer (“Cramer”). Under normal circumstances, at least 80% of the Fund’s investments is invested in the inverse of securities mentioned by Cramer.

The Fund’s adviser monitors Cramer’s stock selection and overall market recommendations throughout the trading day as publicly announced on Twitter or his television programs broadcast on CNBC, and sells those recommendations short or enters into derivatives transactions such as futures, options or swaps that produce a negative correlation to those recommendations.

The Fund goes long on stocks or ETFs that represent sectors that Cramer is negative on. The Fund uses Index ETFs and inverse Index ETFs to take the opposite side of Cramer’s announced market view. The Fund’s portfolio is comprised generally of 20 to 25 equally weighted equity securities of any market capitalization of domestic and foreign issuers.

If Cramer does not take any view on any of the securities in the Fund’s portfolio, the adviser retains discretion to sell positions once profit or loss targets are met, or market conditions such as large swings in either direction necessitate a sale and replace them with securities that meet the criteria of the Fund’s initial portfolio. Under normal circumstances, the Fund will hold positions no longer than a week but could hold position longer if Cramer continues to have a contrary opinion.

The adviser has discretion to not transact in equity securities mentioned by Cramer or engage in related transactions if such securities or transactions are (i) not well suited for ETFs, (ii) have an excessive level of risk, (ii) illiquid, or (iv) negatively impacting the Fund’s ability to meet IRS and Investment Company Act of 1940 diversification requirements. In addition, the adviser has discretion to determine whether Cramer’s statements about any given equity security is in fact an investment recommendation and thus ineligible for inclusion in the Fund’s portfolio.

Due to the Fund’s investment strategy, it is expected that the Fund will have a high turnover rate.

This catch-all approach to Cramer benefits from simplicity but might not capture all of his variables.

For example, a 2021 study of Cramer’s predictive powers over the previous 15 years found that his “accuracy may be limited to positive and buy recommendations,” and that “the featured stock segment of the show seems to have the highest recommendation accuracy for both positive and negative recommendations.”

Also relevant is the rational agent problem — namely, stocks will go up or down based on whether investors think they will go up or down based on whether Cramer has said they’ll go up or down. Behavioral finance matters because Cramer-quantification has been a surprisingly active subject of research.

A 2011 paper found that Cramer’s influence on share prices was shortlived, at least for buy recommendations, and that portfolio outperformance was overly reliant on “beta exposure, smaller stocks, growth-oriented stocks, and momentum effects”. Its findings echo a 2009 study that concluded: “While Cramer may be entertaining and mesmerizing to many of his viewers, his aggregate or average stock recommendations are neither extraordinarily good nor unusually bad.” Meanwhile, media studies faculties have been seeking to understand whether Cramer’s credibility as a stockpicker was permanently tarnished by the infamous Jon Stewart standoff.

These findings might be considered to make an argument in favour of active stock selection, in a way that Cramer’s multi-decade TV career has not.