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In the tough markets we've seen all year, you can't afford to have anything but the best investments in your portfolio. But even if you decide to pass on the myriad individual stocks you could buy and instead focus on exchange-traded funds, the ETF universe is huge -- and growing all the time. How can you find the ETFs that will do right by your hard-earned investment money?
Today, we're introducing a series of articles aimed at uncovering next year's top ETFs right now. Over the next few weeks, our Motley Fool contributors will share their picks for next year's best ETF, providing plenty of insight and reasoning to support their choices.
But to provide a strong foundation to help you evaluate our best-ETF choices, let's look at the ETFs that have performed best so far this year. By looking at what worked in 2011, you may be able to get some ideas on how to make ETFs work for you in 2012.
The trends that have worked this year
Take a look at the top-performing funds year-to-date, and a number of obvious themes pop up:
- Bonds were the place to be in 2011. The top four performers were all leveraged ETFs that made extremely bullish calls on returns for long-term Treasury bonds. Yet ironically, those top ETFs all had very low asset levels, with none of them eclipsing the $100 million mark. Still, even among conventional ETFs like iShares Barclays 20+ Year Treasury (AMEX: TLT ) , those that owned Treasuries put in some of the best performances.
- Commodities again made the spotlight, but unlike some past boom years, the news wasn't all positive. Although ProShares Ultra Gold (AMEX: UGL ) again provided strong gains, another ETF focused on betting against base metals like copper, aluminum, and zinc also showed up among the top performers. Given the terrible performance for base metals producers such as Freeport-McMoRan (NYSE: FCX ) , Alcoa (NYSE: AA ) , and Teck Resources (NYSE: TCK ) , the inverse ETF's strong returns aren't all that surprising.
- For the most part, stock funds didn't make a big appearance on the list. With U.S. stocks having flitted above and below the flat-line for the year, inverse-leveraged-tracking ETFs on emerging-market stocks were the main equity-related ETFs to show up on the list. Again, with standard emerging-market ETFs like Vanguard MSCI Emerging Markets (AMEX: VWO ) and iShares MSCI Brazil (AMEX: EWZ ) performing poorly, those ETFs that made bets against the sector were bound to perform well.
Looking forward, though, it's hard to predict whether the trends that produced those strong returns will continue. Treasury yields have been near record lows for a long time. The demand for safety could well continue -- the Federal Reserve has promised to keep interest rates low throughout 2012 -- but it would take significant further declines in rates to push prices high enough to get leveraged bond ETFs back on the top-performer list. Similarly, gold has had a strong run already, making plays for further gains pretty speculative. And while stocks have been in the doldrums, a reversal of fortune could put investors in bearish leveraged-stock ETFs into a world of hurt.
Bring on 2012
What it all boils down to is that you can't go into 2012 assuming that what worked this year will keep working. That's why our Fool contributors are racking their brains to come up with the picks that could show up at the top of the charts this time next year. So be sure to stay tuned as we reveal our picks for the best ETFs for 2012. As they make their picks, we'll post links to the entire series right here.
- Market Vectors Mortgage REIT Income (MORT)
- Vanguard Dividend Appreciation (VIG)
- Global X Silver Miners (SIL)
- SPDR S&P Biotech (XBI)
- iShares Morningstar Large Value (JKF)
- Vanguard High Dividend Yield (VYM)
- Vanguard Total Stock Market (VTI)
- Vanguard MSCI Emerging Markets (VWO)
- SPDR S&P Dividend (SDY)
In the meantime, if you just can't wait for some great ETF ideas, we've got three for you right now. Join the thousands of readers who've looked at the Motley Fool's special free report on exchange-traded funds to learn about three ETFs that could soar in the next recovery.
Here's to a prosperous 2012!
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.