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 ETFs over the past three years and combining that information with the views of the collective intelligence of the professional and novice investors at Motley Fool CAPS. We'll see which funds our participants have rated as the best.

Tread carefully here, Fools; while the market offers many ETFs, few have very long histories. A handful of them have a greater than three-year performance standard, and only time will tell whether the others can build similarly solid track records over longer time periods.

Climbing a wall of opportunity
Flight to safety. Those words typically apply when the market is heading toward a recession. Over the past three years the stock market has done well for itself, rising more than 17% in spite of recording a loss during the past 12 months. Yet that pales in comparison to how these ETFs have performed, and we might soon be seeing a further "flight to safety."

Most ETFs center on markets in developing economies like Brazil and China. That's part of the reason the analysts at Motley Fool Global Gains have stressed having an international outlook when developing your own portfolio. Interestingly, though, one of the above ETFs is not based on a country's economy, but rather this country's monetary policies -- or rather the effects of it.

streetTRACKS Gold Shares is the oldest and biggest of the gold ETFs, and it has accumulated nearly $17 billion in assets since it was created in 2004. Often over long periods of time gold has underperformed the market, but more recently it has been beating the pants off stocks. That just might be the case for the near term, too.

The Federal Reserve has not only slashed interest rates while risking inflation, it has signaled that it is willing to keep the easy-money floodgates open. In inflationary and recessionary times, investors flock to the safe haven of gold, and streetTRACKS' ETF ought to continue to do well.

It's this willingness by the Fed to try to spend its way out of a recession that has CAPS All-Stars like Sinchiruna, who has a 99.73 player rating, looking to gold for future outperformance.

Gold is going through $1,650...The U.S. Dollar has no support, technical nor fundamental. Congress and the FED have made it blatantly obvious that they are willing to desperately try to print / inflate their way out of this mess, and this makes gold's future gains a given... GLD and [iShares COMEX Gold Trust] will both do well."

While gold is off the highs of $938, if the U.S. enters a recession, or if inflation rises (or both!), a continued flight to safety could further boost the price of gold, maybe even to the heights our CAPS All-Star predicted late last month.

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.