The Best ETF for 2007

Back in 1993, picking an exchange-traded fund was easy. That's because there was just one -- SPDRs (AMEX: SPY  ) . By 2001, however, ETF selection had gotten significantly more difficult. There were roughly 90 ETFs available, and all told, they had approximately $83 billion in assets.

Fast-forward five years. In September 2006, there were 290 ETFs with $350 billion in combined assets, according to the Investment Company Institute. And things are not slowing down. As BusinessWeek reported: "Upwards of $5 billion in new assets flowed into ETFs in the second week of October alone."

The 290 ETFs now on the market probably just scratch the surface of what's coming. According to a recent MarketWatch commentary, "[N]ow it appears there are more funds in registration than currently listed on U.S. exchanges." These range from the niche (Belgium, or steel, or silver, or renewable energy) to the super-niche (the not-yet-active eye-malady ETF).

You cannot stop ETFs; you can only hope to contain them
Equally fascinating is the rate at which ETFs are bought and sold on a daily basis. Consider that the most active stocks in the market aren't really stocks at all -- they're ETFs! For instance, Monday's most active trades were as follows.

Ticker

Volume, Nov. 13, 2006*

Nasdaq 100 Cubes
(Nasdaq: QQQQ  )

89,143,604

SPDRs

59,377,700

Sun Microsystems
(Nasdaq: SUNW  )

58,706,115

Cisco Systems
(Nasdaq: CSCO  )

49,334,277

Microsoft

47,276,755

Intel (Nasdaq: INTC  )

45,839,423

Pfizer (NYSE: PFE  )

41,132,400

iShares Russell 2000 Index (AMEX: IWM  )

39,337,000

*Includes all three major U.S. exchanges. Data from Yahoo! Finance.

With three of the top eight most-active tickers being ETFs, it's clear that these funds have become vital investment vehicles.

Acts like a fund, trades like a stock
And this makes sense, for innovation breeds investment. ETFs are revolutionary investment vehicles for individual (or institutional, for that matter) investors. With ETFs, you can buy or sell short commodities, nation indexes, or sector indexes, but diversification is just one benefit. They also:

  1. Are cheap.
  2. Are tax-efficient.
  3. Give flexibility in buying and selling over the course of the day.

So with all of this going on, you can see why picking the Best ETF for 2007 has become an involved process. Yet that's the question we're setting out to answer today with your help: Which ETF is the best to own for next year and beyond?

The method to our madness
With the aid of our brand-new Motley Fool CAPS community-intelligence database, we've identified 11 promising ETFs. If you follow the links below, you'll find an analyst making a case for each of them. We ask you to read about them and make your thoughts known in CAPS (and add your own analysis, if you'd like). If you agree with the analysis, rate the ETF an "outperform" in CAPS. If you disagree, rate it "underperform." The ETF with the most new, net outperform ratings (outperform ratings minus underperform ratings) will win the contest.

By Monday, our community of investors helping investors will have declared the best ETF to own for 2007. Get going by reading the analysis below, and then make your voice heard by joining CAPS yourself. Feel free to take a peek at the Fool's ETF Center, too.

Brian Richards owns shares of Microsoft but of no other companies mentioned. Microsoft, Intel, and Pfizer are Inside Value recommendations. The Fool has a disclosure policy.


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