The ETF Invasion

There was a time when the list of best stocks right now, according to more than 100,000 investors participating in Motley Fool CAPS, consisted of just stocks.

When the iShares MSCI Singapore Index (EWS) exchange-traded fund showed up as one of the 10 best stocks on CAPS back in October, I thought nothing of it. Either it was just an anomaly, or the Singapore ETF was really that good of an investment. In any case, I didn't expect to see it back on the list in November.  

Yet there it was again. And this time, it brought along a friend -- the PowerShares Water Resources ETF. In every month since then, at least one ETF has made the list of top investments on Motley Fool CAPS.  

But I never expected to see the day when ETFs would make up fully six -- yes, six -- of the top 10. Yet here we are.

Your top picks
Here are the top six ETFs as rated by CAPS investors:

Source: Motley Fool CAPS, as of May 13, and Morningstar.

Please bear in mind that these are not formal recommendations. Instead, I offer this list as a jumping-off point for further research. In fact, researching five-star CAPS picks such as these has proved to be an effective tool for investors.

But are we missing the point?
Perhaps I should have seen this coming. According to the Investment Company Institute, ETF assets grew 28% over the 12 months ended in March. Moreover, during that period, 190 new ETFs came to the marketplace. And all of this happened while the number of mutual funds actually shrank.

There are obvious reasons why ETFs have gained in popularity. ETFs have distinct advantages over mutual funds, and the six ETFs listed above could indeed make for tremendous investments.

But this trend away from individual stocks is a bit concerning. Even though ETFs are a quick way to diversify across a sector or region, that shouldn't excuse investors from doing due diligence on individual stocks. In fact, most regional ETFs, such as iShares MSCI Canada and iShares MSCI Taiwan, are heavily weighted on their top 10 holdings, so investors should still take the time to get to know those important stocks before investing.

In addition, great stocks will outperform their index. For example, although the iShares MSCI Brazil ETF was the best-performing ETF of the past five years and posted an astounding 800% gain over the period, two of its top holdings, Petrobras (NYSE:PBR) and Vale (NYSE:RIO), have done even better in returning more than 1,200% and 1,600%, respectively. Doing the extra research on Petrobras and Vale back then would have been well worth your time, to say the least.

What do you think of the ETF invasion? Do you think it's here to stay, or should investors focus on individual stocks instead? The 100,000-plus investors on Motley Fool CAPS are waiting to hear your opinion. Get started today -- CAPS is 100% free!