Index funds have long been a Foolish way to gain instant, low-cost diversification without worrying about timing the market. Their ease and convenience may explain the growing popularity of exchange-traded funds -- mutual funds that trade like stocks. According to the Investment Company Institute, ETF assets totaled more than $572 billion of the more than $1 trillion in stock index funds as of Nov. 30.

Originally modeled after index funds, ETFs have gradually narrowed to target specialized slices of the market. While that's a boon to investors seeking specifically targeted investments, it also concentrates the risks of specialization, tilting a portfolio away from the diversification that makes index investing attractive.

Eastern promises
On Wall Street, China was the hot topic of the year once again, if not always in a positive way. Prior to the proliferation of focused ETFs, investors interested in China's growing economy had to choose from mutual funds like The China Fund or The JF China Region Fund. With far more options now available, let's see how well China-focused ETFs fared this year.

ETF

Net Assets

YTD Return

CAPS Rating

iShares FTSE/Xinhua China 25 Index (NYSE:FXI)

$7.23 billion

53.47%

***

iShares MSCI Taiwan Index (NYSE:EWT)

$2.81 billion

3.93%

*****

PowerShares Gldn Dragon Halter USX China (AMEX:PGJ)

$775.8 million

53.06%

****

SPDR S&P China

$202.7 million

68.14%*

****

iShares MSCI Hong Kong Index (NYSE:EWH)

$2.53 billion

38%

*****

SPDRs

$75.98 billion

3.87%

NR

Source: Yahoo! Finance. CAPS Ratings courtesy of Motley Fool CAPS. NR = not rated.
*Began trading March 23, 2007.

Tread carefully here, Fools; while the market offers many exchange-traded funds, few have a long history. Only the iShares indexes (and the S&P-tracking SPDRs) have a three-year performance standard. That's an arguably important performance milestone, but only time will tell whether these ETFs can build similarly solid track records over five- and 10-year periods.

Climbing a wall of opportunity
Fools looking to diversify holdings into foreign ETFs don't need more than one of the above funds in their portfolios. Aside from the indexes, they all tend to invest in the same companies. The top three holdings of most of these funds include China Mobile (NYSE:CHL), PetroChina (NYSE:PTR), and China Life (NYSE:LFC). Owning more than one of these would concentrate your holdings, not diversify them.

Although they do invest in the same clutch of companies, the weighting each fund gives its holdings might set some apart. That's one of the reasons why CAPS investor Kbob108 likes the PowerShares ETF:

So China is red hot, possibly overpriced and in the [beginning] stages of a potential bubble. Still [it's] gonna be big overall as the years go by and it's just a matter of deciding how and when to get in, not if. I like PGJ better than some of the other ETF's for China because it's weighting for financial services is more moderate than say FXI or GXC who have around 40% and 30% respectively in financials. Long term you can take this one to the bank.

A basket of opinions
Although ETFs have been around since the 1990s, investors should exercise caution with any ETF lacking a long track record. Over on CAPS, let us know whether you think these ETFs will continue to outperform, or whether it's time for new ones to top the lists.

Fool contributor Rich Duprey does not have a financial position in any of the funds mentioned in this article. You can see his holdings here. The Motley Fool owns shares of SPDRs. The Fool's disclosure policy has been around the world and back again.