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Where the Big Money's Going in 2012

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Many successful investors have made millions by going against the grain. But before you can do that, you need to know which way the grain is going. With 2012 more than halfway over, now's a smart time to take a closer look at where investors have put their hard-earned money so far this year, with an eye toward figuring out whether betting against them makes sense in the current market environment.

Looking backward
At first glance, you might think looking at past actions would do more harm than good. After all, even though past performance doesn't guarantee future results, countless investors fall into the trap of chasing strong-performing investments. That happens especially often in the $1.18 trillion exchange-traded fund market, in which investors can choose countless variations on nearly any investing theme they want to use in their portfolios.

But it's exactly that dynamic that makes looking backward for information so lucrative. By distinguishing momentum-driven moves from apparent value plays, you can often find some popular plays for which it does make sense to join the crowd, while also steering clear of much-loved investments that carry far more risk than most people realize.

The big love for bonds
So far in 2012, ETFs that focus on bonds have been the big money-draws. With 18 straight months of inflows, bond ETFs have brought in more than $35 billion this year, amounting to more than 40% of total inflows for ETFs around the world.

Interest in bonds may seem ridiculous given their low current yields. But the gradual drop in rates in recent years has given bond funds substantial total returns that in many cases have exceeded what you could earn in a largely flat stock market. Moreover, the popularity of Bill Gross' new active PIMCO Total Return ETF has reinvigorated the space.

With rates so low, however, there's little room left for further capital gains from bond funds. And although low rates could persist for a long time based on current government and Federal Reserve policy, the eventual rises in rates will reverse the gains for bond investors and create what could become surprising capital losses.

International conflict
One area where investors are torn is in emerging markets. On one hand, Vanguard MSCI Emerging Markets (NYSE: VWO  ) took in $7.5 billion, the most of any ETF in 2012 according to Index Universe. But a recent Fox Business article also noted that both the broad-international ETF iShares MSCI EAFE (NYSE: EFA  ) and the single-country fund iShares MSCI Brazil have seen an exodus from investors this year.

Here again, though, relative performance tells the story. Even as China and Brazil have suffered challenges to their lightning-fast growth rates in past years, certain subsectors have held up well. For instance, China Mobile and America Movil have done well from their perches atop their respective home markets, even as struggling giants France Telecom (NYSE: FTE  ) and Telefonica (NYSE: TEF  ) increasingly rely on their forays into emerging-market economies to offset weak business activity in Europe. With China Mobile and America Movil among its holdings, the Vanguard ETF has gained ground this year even as funds focused more on China and Brazil have faltered.

For emerging markets, much depends on whether the future turns out as badly as many people fear. Some analysts are calling for an all-out implosion in China, while others believe a soft landing is still possible for the slowing Chinese economy. In turn, with Vale (NYSE: VALE  ) and dozens of other resource-based emerging-market companies so reliant on Chinese demand, the fate of the entire emerging-market space is in China's hands.

Meanwhile, Europe represents a value investor's dream. But the broad ETF approach may not be the best one to take. Instead, realizing that great stocks are being lumped in with less promising ones as the stock markets in Europe have fallen, separating the best from the rest will get you your best chance at top returns.

Go your own way
Following the crowd blindly is rarely a smart investing move. But if you know where the crowd is, you'll be better able to capitalize on those opportunities it identifies correctly, while also making it easier to avoid the inevitable mistakes that the crowd always makes.

For instance, many of those who think emerging markets are long-term winners never think to focus on U.S. companies that stand to benefit from them. But we've found three particularly promising ones, and we're naming names in our latest special report: "3 American Companies Set to Dominate the World." This report is completely free, so don't miss out!

Fool contributor Dan Caplinger likes watching the Big Money from a small-money perspective. He doesn't own shares of the companies mentioned in this article. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of China Mobile and France Telecom. Motley Fool newsletter services have recommended buying shares of France Telecom. 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 Fool's disclosure policy tells you all, big or small.

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