This week, as we reflect upon 2010, we're looking back at the year's biggest winners.

Let's get right into the year's six top-performing exchange-traded funds (ETFs):


What it tracks

2010 Return

ProShares Ultra Silver (NYSE: AGQ)






iShares Silver Trust (NYSE: SLV)



ETFS Physical Silver Shares (NYSE: SIVR)



PowerShares DB Silver Fund (NYSE: DBS)



Direxion Daily Small Cap Bull 3x (NYSE: TNA)

Small caps


Data from Capital IQ, a division of Standard & Poor's. Returns from Jan. 1 to Dec. 17.

What lessons can we draw from these six monster performers? Not as many as I was hoping. Here's why:

  • The No. 2 top performer, B2B Internet HOLDRS, is a bizarre fund that tracks "business-to-business" Web companies and currently has two holdings. Two. (Why not just buy the two stocks instead of this ETF?) The stocks, by the way, are Ariba and Internet Capital Group.
  • Two of the six are leveraged -- a 2x ("Ultra Silver") and a 3x of the small-cap index. Leveraged ETFs are very risky, and sometimes don't do what they say they will (e.g., provide twice the return of the index they track).
  • Four of the top six ETFs tracked silver, a commodity that did really well in 2010.

What to do
Still, there are a few takeaways to keep in mind for 2011.

Diversify. The fact that silver, small caps, and business-to-business Web indexes outperformed in 2010 is a reminder that it's impossible to predict the market. (I don't remember many articles from this time last year proclaiming those three areas the places to be in 2010.) Staying diversified is your best bet, although I'm not a believer in allocating funds to a leveraged vehicle or a two-stock index. For a primer on constructing a simple, diversified portfolio, read my colleague Dan Caplinger's The First 5 ETFs You Should Ever Buy.

Include commodities. Silver had a great run this year. So did gold. Don't ignore commodity-focused stocks; they can serve as a good hedge against inflation and currency fluctuations. If you're uncomfortable picking individual stocks, ETFs are a good route. For exposure to gold and silver mining stocks, my colleague Christopher Barker likes the Market Vectors Gold Miners ETF (NYSE: GDX) and Global X Silver Miners ETF (NYSE: SIL).

Use indexing carefully. Call me old-fashioned, but my buy-to-hold investing philosophy doesn't have room for leveraged ETFs or extreme niche plays. I personally own Vanguard Emerging Markets (NYSE: VWO) and Vanguard Dividend Appreciation (NYSE: VIG). I only look to indexes for broad diversification, for exposure to an area I believe in but am not comfortable going the individual-stock route, and/or to keep costs in check.

ETFs can be great things, if used for the right reasons.

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Here's to a prosperous 2011!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.