ETFs for Tomorrow

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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 $608 billion of the more than $1 trillion in stock index funds as of Dec. 31.

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.

Today, we're looking at ETFs with expenses of less than 1% that have performed the best over the past year. We'll then combine that information with the views of the collective intelligence of the professional and novice investors at Motley Fool CAPS and see which funds our participants have rated as the best.

ETF	1-Year Return	Expense Ratio	CAPS Rating
iShares:MSCI Brazil (NYSE: EWZ)	63.69%	0.69%	*****
United States Oil  (AMEX: USO)	56.41%	0.67%	**
PowerShares DB Commodity Idx Trking Fund  (AMEX: DBC)	43.81%	0.92%	****
iShares FTSE/Xinhua China 25 Index  (NYSE: FXI)	43.23%	0.74%	***
iShares S&P Latin America 40 Index  (NYSE: ILF)	38.07%	0.50%	*****
PowerShares Gldn Dragon Halter USX China  (AMEX: PGJ)	35.03%	0.70%	****
iShares Dow Jones U.S. Oil & Gas Ex Index	33.93%	0.48%	*****
Rydex S&P Equal Weight Energy	31.75%	0.50%	****
SPDR S&P Oil & Gas Exploration & Prod  (AMEX: XOP)	31.44%	0.35%	*****
SPDR S&P Metals & Mining	31.29%	0.48%	*****

Source: Yahoo! Finance, Wall Street Journal. CAPS ratings courtesy of Motley Fool CAPS. WSJ screen filtered out funds with no reported expense ratio.

Tread carefully here, Fools; while the market offers many ETFs, few have long histories. Less than half of these ETFs have a three-year performance record, arguably an important milestone, so only time will tell whether they can keep up the good work over longer time periods.

Climbing a wall of opportunity
ETFs tend to have very low annual costs, particularly when compared to the average mutual funds expense ratio of 1.5%, and they are also extremely tax-efficient. You're not paying for a manager's active consideration of an individual stock's performance but rather buying an index. 

Brazil remains one of the top economies to invest in these days, and has been one of the hottest performers over the past few years. It's not surprising then that iShares Brazil remains a CAPS favorite. With more than 1,100 investors rating this ETF, some 98% have marked it to outperform the market, like All-Star jerry1027, with a 99.64 player rating, who thinks the Brazilian economy will remain resilient.

BRIC [Brazil, Russia, India, China] is still a good place to be long term as their strong internal economies will be less affected by the U.S. slowdown.

Others, among them CAPS investor tommyspanish, believe that with many people chatting up the country, an index that matches its performance will benefit from momentum at least in the short term, and possibly over the longer haul.

Ample natural resources and a rising middle class. The talking heads are all touting Brazil this should be a great momentum trade over next 6mo to 1 year.

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.