Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you -- or in broad swathes of the market. Simple S&P 500 index funds have outperformed most managed mutual funds over many years, but the cleverly tweaked Rydex S&P 500 Equal Weight (NYSE: RSP) ETF seems to be doing even better. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in 500 major companies all at once.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Rydex ETF's expense ratio -- its annual fee -- is a relatively low 0.40%. It's true that some S&P 500 funds have fees below 0.10%, but based on past performance, this 0.40% might be worth it. The Rydex ETF has outperformed its benchmark, the conventional S&P 500 fund, by holding its 500 components in roughly equal proportions, instead of weighting them by market cap.

Over the past five years, the Rydex ETF averaged 4.4% annually, beating the S&P 500 index's average return of 2.5%. Over the past three years, its 4.7% average topped the S&P 500's 0.4%. As with most investments, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver. With a low turnover rate of 20%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Several of this ETF's components made strong contributions to its performance over the past year. Netflix (Nasdaq: NFLX), for example, gained 141%, ramping up its higher-margin streaming delivery channel and integrating itself into consumer electronics products. Cloud-based salesforce.com (NYSE: CRM) rose 63%, focusing on marketing and long-term growth more than maximizing profitability in the short term. Citrix (Nasdaq: CTXS), meanwhile, advanced 93% as it moved into virtual computing and embraced an open-source philosophy that's paying off.

Those companies happen to be among the ETF's top 25 holdings, which is not the case with traditional S&P 500 index funds. The top 25 holdings of the SPDR S&P 500 (NYSE: SPY), for example, each sport market caps greater than $100 billion, leaving little room for smaller but rapidly growing players such as $14 billion Netflix. The SPDR's top holdings also represent a much larger proportion of the overall fund, leaving little influence for smaller companies. Fully 18% of its assets are in its top 10 holdings, compared to just 2.7% for the Rydex ETF, where only recent market performance pushes some holdings above others.

Other companies didn't add much to the Rydex ETF's returns last year, but could have an effect in the years to come. SUPERVALU (NYSE: SVU), for instance, is down 27% and is struggling with debt and rising food prices, but it has also been growing its free cash flow.

The big picture
A well-chosen ETF can grant you instant diversification across the whole market -- and make investing in and profiting from stocks that much easier.

ETFs can help you find the way to better investing results. To find some great ETF investing ideas, take a look at The Motley Fool's special free report, " 3 ETFs Set to Soar During the Recovery ."

Longtime Fool contributor Selena Maranjian owns shares of Netflix, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of SUPERVALU. Motley Fool newsletter services have recommended buying shares of Salesforce.com and Netflix, buying puts in Netflix, and buying calls in SUPERVALU. A separate service has recommended shorting Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.