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 $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.

Today, we're looking at the ETFs whose holdings have had the best earnings growth over the past 12 months. We'll combine that information with 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	Sector	TTM Earnings Growth	CAPS Rating (out of 5)
Claymore/BNY BRIC  (AMEX: EEB)	Emerging markets	49.00%	*****
Market Vectors Global Alternative Energy ETF  (NYSE: GEX)	Natural resources	29.35%	*****
Claymore/AlphaShares China Real Estate  (NYSE: TAO)	Real estate	29.06%	****
HealthShares Euro Medical Products & Devices	Health	26.99%	NR
First Trust ISE Chindia	Asia Pacific, without Japan	25.17%	****
PowerShares DWA Emerging Markets Technical Leaders	Emerging markets	23.48%	NR
PowerShares Global Clean Energy	Natural resources	23.14%	NR
iShares FTSE EPRA/NAREIT Asia  (Nasdaq: IFAS)	Real estate	22.44%	NR
HealthShares Dermatology & Wound Care	Health	21.66%	NR
HealthShares Respiratory Pulmonary	Health	21.13%	NR

Source: Yahoo! Finance. CAPS Ratings courtesy of Motley Fool CAPS. NR = not rated.

Tread carefully here, Fools; the market offers many exchange-traded funds and securities that look like funds, but aren't -- like exchange-traded notes. Moreover, few have a three-year performance standard, an arguably important milestone, and only time will tell whether any of these can build similarly solid track records over longer periods.

A world of opportunity
Of course, it's possible to pick the absolute worst performing stocks from any particular universe, but when you're selecting the stocks from some of the fastest growing economies around the world, that's hard to do. That's how the Claymore/Bank of New York BRIC ETF finds itself atop the heap. It seeks to mimic the performance of the bank's BRIC index, which chooses stocks from the markets of Brazil, Russia, India, and China that trade on U.S. exchanges. Yet by focusing on China and Brazil, and in particular on the miners and oil companies, it has reaped the windfalls that come with the growth those economies, and sectors, have achieved.

Among its top 10 holdings are companies like PetroChina (NYSE: PTR), Petroleo Brasileiro (NYSE: PBR), and Vale (NYSE: RIO), which investors have warmed up to as well, sending their shares up an average of more than 70% over the past year -- though most of that was from Petrobras.

CAPS All-Star TMFSinchiruna noted in April that with PetroChina's shares having fallen off their highs by about 50%, there was little downside risk, considering the demands for oil in China.

While it's clear [PetroChina's] stock was getting a little ahead of itself on a valuation basis, the story has not changed. China will continue to need as much oil as companies like this can possibly find, and the strength of the price of oil should have provided some support to this one as it fell, but it didn't. A 50% drop from its highs is way overdone in my opinion. CNOOC has already begun its recovery from lows, while [PetroChina] has not. Downside risk from these levels is virtually non-existent in my opinion.

Others, like top-rated CAPS investor binv271828, see Vale's diversity of mining operations leading to possible long-term growth. Here's an excerpt:

They are one of the [world's] largest iron ore and pellet producers. Have you seen the demand and price for steel recently? Additionally Vale also produces bauxite, alumina, aluminum, copper, coal, cobalt, precious metals, potash, etc. These are all in huge demand. They have operations all over the world, most in Brazil (obviously) but also in Canada, Indonesia, UK, China, Australia, etc. This is [a] well diversified company.

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.