Best and Worst ETFs

You know all about exchange-traded funds (or "ETFs"), right? You know how they're sort of like shares of mutual funds (typically index funds) that trade like stocks, right? And you know that they offer some tax advantages and can be better than funds for those regularly investing modest amounts, or those who would like to short various indices. Right? (If you don't know all this, get thee to our ETF Center, which will explain why you should consider adding ETFs to your portfolio.)

Meanwhile, though, I'd like to draw your attention to an interesting piece from Forbes.com. In it, Jim Lowell offered a list of the best and worst ETFs in various categories, explaining how he went about ranking them. Factors considered include the ETFs' risk-adjusted returns and performance relative to benchmarks.

Here are a few results. The best large-cap ETF was the PowerShares FTSE RAFI U.S. 1000 (NYSE: PRF), which gained nearly 22% over the past year, a few percentage points ahead of the S&P 500. Its expense ratio is 0.76%, which is lower than the 1% or more you'll see for typical managed stock funds, but is several times higher than rates for some S&P 500 index funds. Its top holdings recently included General Electric (NYSE: GE), Kraft Foods (NYSE: KFT), and Wal-Mart (NYSE: WMT).

Rated worst among large caps was the PowerShares Dividend Achievers (AMEX: PFM) ETF, which actually sports many top holdings in common with the "best" contender above. Its top holdings recently included longtime dividend boosters Procter & Gamble (NYSE: PG) and Pfizer (NYSE: PFE). With an expense ratio of 0.67%, it sports a return of almost 16% over the past year, lagging the S&P 500 by 3%.

When you study ETFs, make sure you look at them from several angles. Don't just look at their returns. Don't just look at the broad index or narrow niche they represent. Look at those in combination with their fees, and the fees and returns for similar offerings. Compare their performance to their benchmark index, as well as competing offerings. Aim to get the biggest bang for your bucks.

If you'd like to follow discussions about ETFs, head to our discussion board dedicated to that topic. And do drop by our ETF Center, too.

If you're interested in mutual funds (which can sometimes make more sense than ETFs), I invite you to test-drive, for free, our Motley Fool Champion Funds newsletter, which has recommended lots of terrific funds (I've found a few there, myself), and even tackles ETFs now and then. A free trial will give you full access to all past issues.

Longtime Fool contributor Selena Maranjian owns shares of General Electric. Kraft Foods is a Motley Fool Income Investor recommendation. Wal-Mart and Pfizer are Inside Value picks. Try any one of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.