Cramer's Tip for Investing in a China Rebound

I can’t stand exchange-traded funds.

ETFs are an affront to my stock picking abilities. Be darned if I am going to own some instrument that has stocks I like -- and stocks I hate -- in the name of not being able to do the homework or discern among the best or the worst.

It just seems like something, still one more gimmick, Wall Street generated to take more money away from hard working people who don’t know enough to do the job.

Believe me, I know this is a minority position. People use ETFs everyday and they have become an important part of an individual’s arsenal to diversify for those who are unsure of a sector but recognize the need to diversify.

I was reading recently about the problems of the workers, for example, who toil at Fannie Mae and Freddie Mac and have their income and their retirement tied up with those two ne’er-do-well stocks. I know that anyone there who said “wow, this financial sector is awful, I want to be in anything but financials for my retirement” would have been well served by ETFs.

I also have no quibble with the structure: mutual funds often charge too much for the same performance that an ETF can give you. The ease and simplicity of ETFs make them good tools, too, for those who don’t want to set up individual mutual funds at different places.

Even though I don’t like them, I may have come up with that particular dilemma that an ETF can solve: China. I don’t trust the Chinese. I don’t trust their accounting. I am always afraid that I will pick a Chinese company that has outrageous accounting or that is simply hiding losses. I have seen too many fly-by-night Chinese companies in my time to believe that it is safe to invest in one.

But with the Shanghai Composite Index down more than 50%, and with the Olympics behind them -- an event that I think alternatively caused tremendous building and then, because of pollution, a tremendous slowdown -- China could be worth a flier on a bounce back.

In other words, if you think China can come back, and you don’t trust that you can find the “best” stocks because you believe that even the best can be corrupt, an ETF may be the way out of the conundrum. That’s why I like the CHN, the China Fund.

ETF purists will say, “Jim, that’s a closed end management fund,” but it fulfills, at least for me, the same role as an ETF because it is a basket of companies rather than an individual stock. CHN’s down by half, like China, so it gives me the exposure I need. It will trade with China and I won’t have to worry that a particular Chinese fraud will harm me while China rallies.

I know this is an extreme. I can’t find another place where I believe there is an ETF-like product that I would chose over picking individual stocks. But at this very moment, CHN’s the exception and for those who believe that China can come back, this selection might be right for you, too.