ETFs for Tomorrow

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.

Today, we're looking at the best-performing exchange-traded funds over the past year and then combining that information with the views of the collective intelligence of the 82,000 professional and novice investors at Motley Fool CAPS, to see which funds our participants have rated as the best.

Tread carefully here, Fools; while the market offers many exchange-traded funds, few have a long history. Only one of these has a three-year performance standard -- an arguably important performance milestone -- and only time will tell whether the others can build similarly solid track records over longer time periods.

Climbing a wall of opportunity
The Brazilian economy has continued to benefit from two sectors in particular: oil and mining. Two of the best performers in those sectors are oil and gas exploration company Petroleo Brasileiro (NYSE: PBR) and mining company Companhia Vale do Rio Doce (NYSE: RIO), which have appreciated 118% and 70%, respectively. These have helped drive impressive returns for the iShares MSCI Brazil Index.

It was the B in the BRIC emerging markets -- Brazil, Russia, India, and China -- that attracted CAPS player Kbob108, who saw it as the top investment story of last year in this pitch from last month.

No doubt this is THE hot returns story of 2007 among single country funds. It's hard to get on the train knowing there's got to be a stop up ahead, but I feel confident Brazil will continue to do well for the next few years with a few minor corrections.

While the index enjoyed appreciable returns, particularly over the past few years, it's the components of the fund that make PTRio believe this iShares ETF will be a winner again this year.

With Petrobras and Vale as the backbone of this fund, 2008 should be another strong year for EWZ. Both have very positive news currently. ... Add in the bank stocks ... and the fact domestic spending and borrowing are increasing dramatically in Brasil ... and while [it] would not [guarantee] another 2007 level performance, it could come close.

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.