The Top 6 ETFs of 2010 and What We Can Learn From Them

This week, as we reflect upon 2010, we're looking back at the year's biggest winners.

Let's get right into the year's six top-performing exchange-traded funds (ETFs):

ETF

What it tracks

2010 Return

ProShares Ultra Silver (NYSE: AGQ  )

Silver

153.0%

B2B Internet HOLDRS (NYSE: BHH  )

Web/tech

107.0%

iShares Silver Trust (NYSE: SLV  )

Silver

72.4%

ETFS Physical Silver Shares (NYSE: SIVR  )

Silver

72.3%

PowerShares DB Silver Fund (NYSE: DBS  )

Silver

71.2%

Direxion Daily Small Cap Bull 3x (NYSE: TNA  )

Small caps

66.0%

Data from Capital IQ, a division of Standard & Poor's. Returns from Jan. 1 to Dec. 17.

What lessons can we draw from these six monster performers? Not as many as I was hoping. Here's why:

  • The No. 2 top performer, B2B Internet HOLDRS, is a bizarre fund that tracks "business-to-business" Web companies and currently has two holdings. Two. (Why not just buy the two stocks instead of this ETF?) The stocks, by the way, are Ariba and Internet Capital Group.
  • Two of the six are leveraged -- a 2x ("Ultra Silver") and a 3x of the small-cap index. Leveraged ETFs are very risky, and sometimes don't do what they say they will (e.g., provide twice the return of the index they track).
  • Four of the top six ETFs tracked silver, a commodity that did really well in 2010.

What to do
Still, there are a few takeaways to keep in mind for 2011.

Diversify. The fact that silver, small caps, and business-to-business Web indexes outperformed in 2010 is a reminder that it's impossible to predict the market. (I don't remember many articles from this time last year proclaiming those three areas the places to be in 2010.) Staying diversified is your best bet, although I'm not a believer in allocating funds to a leveraged vehicle or a two-stock index. For a primer on constructing a simple, diversified portfolio, read my colleague Dan Caplinger's The First 5 ETFs You Should Ever Buy.

Include commodities. Silver had a great run this year. So did gold. Don't ignore commodity-focused stocks; they can serve as a good hedge against inflation and currency fluctuations. If you're uncomfortable picking individual stocks, ETFs are a good route. For exposure to gold and silver mining stocks, my colleague Christopher Barker likes the Market Vectors Gold Miners ETF  (NYSE: GDX  )  and Global X Silver Miners ETF  (NYSE: SIL  ) .

Use indexing carefully. Call me old-fashioned, but my buy-to-hold investing philosophy doesn't have room for leveraged ETFs or extreme niche plays. I personally own Vanguard Emerging Markets (NYSE: VWO  ) and Vanguard Dividend Appreciation (NYSE: VIG  ) . I only look to indexes for broad diversification, for exposure to an area I believe in but am not comfortable going the individual-stock route, and/or to keep costs in check.

ETFs can be great things, if used for the right reasons.

If you're looking to position yourself for 2011 and are interested in individual stocks, check out our brand-new free report, The Motley Fool's Top Stock for 2011, in which we reveal a small company set to profit from broadband Internet expansion. Get instant access by clicking here -- it's free.

Here's to a prosperous 2011!

Brian Richards is managing editor of Fool.com. Brian owns shares of Vanguard Emerging Markets and Dividend Appreciation, as mentioned. The Fool owns shares of Vanguard Emerging Markets Stock ETF and has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 22, 2010, at 5:27 PM, beenfoolonce wrote:

    Ridiculous to throw up a fund with two securities in it, only 6 million in assets and pump it like this. With management fees running what?

    This is a blip.

  • Report this Comment On December 22, 2010, at 5:52 PM, PeyDaFool wrote:

    beenfoolonce,

    How is the author "pumping" these ETFs? He was merely pointing out that they outperformed substantially. If you read the last part of the article, he states "I personally own Vanguard Emerging Markets (NYSE: VWO) and Vanguard Dividend Appreciation (NYSE: VIG). I only look to indexes for broad diversification."

    I don't think it's fair to say he's recommending silver, web/tech or small cap ETFs.

  • Report this Comment On December 22, 2010, at 7:13 PM, xetn wrote:

    It seems to me that the number one pick last year was SLW.

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