Index fund ETFs are designed to give investors an opportunity to mirror a benchmark index's performance, not to beat the index.
An investment tool that holds both winners and losers might not be right for investors who can instead just pick the winners, according to Jim Cramer.
Cramer's Argument Against Diversified ETFs
Individual investors have been led to believe by the "fee-hungry brokerage industry" that they aren't smart enough to own individual stocks and only their diversified ETFs can protect them from downside, Cramer said on Wednesday's "Mad Money."
Granted, the case can be made that sector ETFs are appealing to many investors who can't or won't take the time to pick individual stocks, the CNBC host said.
The tradeoffs in sector ETFs are twofold, he said.
Second, the sector ETF crowd is notorious for using the "same darn strategy," which "rarely works," Cramer said.
'Just Pick The Very Obvious Winners'
Recent market volatility and large sell-offs make it clear that certain sector ETFs aren't designed for "softening the blow" — rather, "it's leaning into the blow," Cramer said.
Investors are better off picking individual stocks and taking advantage of declines by putting some cash sitting on the sidelines to use, he said.
"Why own both the winners and losers in an industry when you can just pick the very obvious winners."
Cramer did say that index funds are a valuable investment tool, especially low-cost funds that mirror the S&P 500 index.
These tools should be the "bedrock of your retirement account," as the S&P 500 itself is an actively managed fund.