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Exchange-traded funds have revolutionized investing. By opening the door to a huge range of investments that weren't available to ordinary investors before, ETFs let you tailor your portfolio in pretty much any way you want.
But the wide variety of ETFs also makes it a lot more difficult to figure out which ones will perform best. With well over a thousand ETFs to choose from -- ranging from gargantuan funds approaching the $100-billion-asset mark, to tiny players targeting very focused niche areas -- ferreting out which ETF you should buy can overwhelm even the most experienced investors.
That's why I've decided to take a look at a few ETFs and closed-end funds that have the potential to produce good returns in 2012 and beyond. They're far from a sure thing, so do your own research and make your own judgment -- but they each have a viable bullish case for you to consider.
1. Vanguard MSCI Europe (NYSE: VGK )
If you want to follow Warren Buffett's advice and be greedy when others are fearful, it's hard to find a better example than Europe right now. With sovereign debt woes continuing to weigh on stocks on the continent, the big drop in European stock markets last year has turned many companies there into bargains.
The situation is so out of whack that corporate bonds are trading for lower yields than sovereign debt in their home countries. That sounds impossible at first glance, but given that many European companies get a big portion of their revenue from beyond the eurozone, they actually give better diversification than sovereign debt that relies entirely on a single country for the revenue to repay it.
Yet as far as a solution may seem, business will go on -- and even if Europe falls into recession, stocks remain attractively valued and could produce huge long-term returns from depressed levels. With exposure to the entire European economy, the Vanguard ETF is a good, inexpensive way to play that trend.
2. Global X Lithium (NYSE: LIT )
With increasing interest in batteries for electric cars and other devices, demand for the lithium to produce those batteries is high. This ETF seeks to capitalize on that demand by investing in the companies that mine lithium or produce lithium batteries.
Last year, the ETF plunged 37%. But analysts expect a 20% jump in lithium prices in 2012, and with the ETF's biggest holdings having additional capacity available to meet demand, those stocks could push the ETF higher this year.
3. Korea Fund (NYSE: KF )
The death of Kim Jong Il has left the Korean peninsula in a state of flux, as Kim Jong Un takes control of North Korea. That has kept the South Korean stock market on edge, but longer term, the move could bolster Korean stocks.
This closed-end fund owns shares of leading Korean companies including Samsung and Hyundai. Currently trading at a 10% discount, the fund fell by 6% in 2011. But with GDP growth of 6.2% in 2010, South Korea has the economic strength to support its stock market. And given the nation's strategic importance in keeping its northern neighbor under wraps, South Korea should continue to benefit from international support for the foreseeable future.
4. SPDR Biotech (NYSE: XBI )
Biotech companies have attracted a lot of attention lately. Hedge fund analysts have seen a lot of interest in biotech stocks such as Biogen Idec and Idenix Pharmaceuticals.
The easy way to play the biotech trend is through this SPDR sector ETF, which includes Biogen and Idenix. Biotech certainly carries plenty of risk, but with traditional pharma stocks facing patent expirations and looking for new pipelines, biotechs make logical takeover targets -- especially those with extensive pipelines of their own. If merger and acquisition activity in the sector rises, the SPDR ETF will reward its shareholders.
5. Gabelli Equity Trust (NYSE: GAB )
If you're bullish on stocks, then leveraged closed-end funds can help boost your returns. This Gabelli fund issues preferred shares to boost its leverage to about 24%.
Currently trading at a 4% discount to its net asset value, the Gabelli Equity Trust owns more than 375 stocks. What has captured the attention of many investors is its huge distribution rate, which exceeded 12% in the most recent year. But keep in mind that the company uses a managed-distribution policy -- meaning that much of those distributions are actually a return of investor capital rather than true income derived from the portfolio. Nevertheless, with some Gabelli closed ends trading at huge premiums, this one may be the bargain of the family.
Find the right ETFs
These ETFs may not be perfect, but they give you a broad cross-section of what's available out there. If you want more great ETF ideas, we've got three more that you shouldn't miss. Read our free special report to get our list of ETFs that should soar in the recovery.