ETFs for Tomorrow

Index funds have long been a Foolish way to gain instant, low-cost diversification without worrying about timing the market. Their ease and convenience may explain the growing popularity of exchange-traded funds -- mutual funds that trade like stocks. According to the Investment Company Institute, ETF assets totaled more than $572 billion of the more than $1 trillion in stock index funds as of Nov. 30.

Originally modeled after index funds, ETFs have gradually narrowed to target specialized slices of the market. While that's a boon to investors seeking specifically targeted investments, it also concentrates the risks of specialization, tilting a portfolio away from the diversification that makes index investing attractive.

As popular as they are today, ETFs haven't been around very long. The very first ETF, the SPDRs (AMEX: SPY), made its debut on Jan. 22, 1993. It wasn't until more than two years later that the MidCap SPDRs showed up on the scene, and it wasn't until the year after that that Barclays (NYSE: BCS) discovered their potential and unleashed a plethora of ETFs that tracked the indexes of 17 countries under their iShares brand name.

Today, we'll check out the top 10 ETFs with the longest histories that have performed the best. It's worth noting that the so-called Diamonds (AMEX: DIA), ETF, which tracks the performance of the Dow Jones Industrial Average, didn't get its start until the second week of January 1998, so it is excluded from our tally.

Climbing a wall of opportunity
While the foreign country indexes dominate this list and have more than doubled the SPDRs' 5.8% return, it's noteworthy that the MidCap SPDRs have done just as well as the international competition. It's this long-term outperformance that attracted CAPS player csguernsey this past summer.

Historically, mid-caps have outperformed large caps over long periods of time. Currently, MDY's [valuation] (in terms of P/E) is just under that of the S&P 500. No one knows what the near term will bring, but over time [this] should be a solid part of a portfolio.

The market researchers at NetScribe agree, but they note that despite huge volume in its shares, it still has a rich expense ratio when compared with some competitors. Here is part of the Netscribe write-up from last March.

MidCap SPDRs has the longest track record for any mid cap ETF with about $9.5 billion in net assets. However it has a problem with its structure being organized as a unit investment trust where by it has to hold dividends as cash till making quarterly distributions to share holders. It [stands] like a giant in [terms] of volumes with more than four times the trading volumes compared to its nearest competitor but has failed to [keep] its expenses low. Despite having good liquidity its expense ratio of 0.25% is huge when compared to Vanguard's 0.13%.

A basket of opinions
Although ETFs have been around since the 1990s, investors should exercise caution with any ETF lacking a long track record. Over on CAPS, let us know whether you think these ETFs will continue to outperform, or whether it's time for new ones to top the lists.