Don't Give Up On These Investments

At last glance, the stock market is just slightly negative on the year, although given recent patterns of volatility, all you have to do is blink for things to whipsaw in the complete opposite direction. And while few investments have been immune from market movements this year, some mutual funds and exchange-traded funds have suffered more than others.

While it may be tempting to toss aside funds that have trailed in this year's volatile market, there are still good investments out there that just haven't been able to catch a break in 2011. Below, I'll highlight three exchange-traded funds that are trailing the market this year -- and why you might want to keep them around.

Exotic and tiny
Outside of gold and other commodities, two corners of the market that have been among the best performers in recent years are emerging markets and small-cap stocks. The SPDR S&P Emerging Markets Small Cap ETF (NYSE: EWX  ) combines the best of both of these worlds. This fairly new fund began in mid-2008 and tracks an index of emerging-market small-cap stocks. Between its inception and the end of last month, the fund has posted an annualized return of 3.4%, compared to a 1.7% loss for the average emerging markets fund.

However, year-to-date, this ETF has fallen on hard times. So far this year, this SPDR has lost 16.1% of its value, compared to an 11.7% loss for the average emerging markets fund and an 8% loss for the MSCI EAFE Index, which measures foreign developed markets. Risky assets have taken it on the chin as global confidence has tumbled, and emerging markets have been no exception.

But this fund still has some solid long-term potential. There aren't a whole lot of emerging markets small-cap funds out there, and certainly none as cheap as this fund's 0.65% price tag. While this corner of the market is very risky, it also promises to hold some of the greatest growth stories of the next decade. To be clear, it's probably not an especially good time to be moving heavily into emerging markets or small-cap stocks as both have had pretty good runs in recent years. But if the market falls further, a fund like this could become more attractive from a long-term perspective.

This isn't a fund for risk-averse investors; only the most aggressive of types should think about plunking down money here. Investors who want emerging markets exposure with somewhat less volatility should gravitate toward a fund like Vanguard MSCI Emerging Markets ETF (NYSE: VWO  ) , which tends to stick to larger, more established names. But if you've got an appetite for risk and a long-term outlook, this ETF could be a good boost for your portfolio, in small doses.

Small-fry troubles
Similarly, the SPDR S&P 600 Small Cap Value ETF (NYSE: SLYV  ) has also lagged this year, losing 7.2%, compared to a 2.3% loss for the S&P 500 Index. But don't go ditching this fund just yet. Small-cap stocks have had trouble gaining traction this year, which shouldn't be too surprising. Large-cap stocks have been overdue for a turn on top, especially since we're past the initial stages of the economic recover, when small caps tend to outperform. And while I think small caps will be dominated by their larger counterparts for the immediate future, all long-term investors should have at least some small-cap exposure.

And since value-oriented stocks have tended to do better than growth stocks over time, a fund like this makes perfect sense. It may lag the market in the coming months as large caps make up for lost time, but with its low 0.25% price tag, this is one of the better funds for long-term, small-value exposure. Similarly, the Vanguard Small Cap Value ETF (NYSE: VBR  ) is just a hair cheaper than the SPDR and offers exposure to the same potentially profitable segment of the market.

Bigger is better
And while large-cap stocks have been relative winners so far in 2011, not all large-cap funds have benefited to the same degree. The SPDR S&P 500 Value ETF (NYSE: SPYV  ) is down 5.4% so far this year, more than double the S&P 500's 2.3% YTD loss. Although value-oriented stocks tend to have the long-term edge over their growth-oriented counterparts, so far this year, growth stocks have been on top, with the SPDR S&P 500 Growth ETF (NYSE: SPYG  ) up 0.7%. Given that growth stocks have trailed the broader market and value stocks by a wide margin over the past decade, I've been predicting for a while that growth-oriented securities would take the lead sometime soon.

But no matter whether growth or value stocks are doing better right now, diversified investors should have exposure to both areas of the market over the long-run, since it's pretty hard to tell which group of stocks will outperform from year to year. So don't go loading up on growth stocks now just because this area is rebounding -- you'll still need some large-cap value exposure for the long-run. Thanks to a low 0.20% price of admission, the SPDR S&P 500 Value ETF is a safe bet to fill that portion of your portfolio, so hang on to this one.

Remember that short-term trends in the market can make good funds look bad from time to time. So if you've got a decent fund that fits nicely into your long-term asset allocation, don't give up on it when the market decides to reward other sectors today -- there will be better days ahead.

For more winning mutual fund recommendations and time-tested personal financial planning advice, check out the Fool's Rule Your Retirement service. You can start your free 30-day trial today.

Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein. The Motley Fool owns shares of Vanguard MSCI Emerging Markets ETF. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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