1 ETF That Ruled the Week

The exchange-traded fund, or ETF, is one of the better financial tools for the individual investor. Trading just like a stock, ETFs are entire portfolios of investments that attempt to replicate the returns of a certain index, market, or benchmark. Charging minimal fees, they can allow diversified exposure to unique areas that would otherwise be prohibitively expensive to invest in broadly.

Keeping a finger to the pulse of popular ETFs, we can get a feel for some broader economic trends. Last week, one ETF stood head and shoulders above its peers.

Weekly performance:

Source: S&P Capital IQ.

In a week where the Dow Jones Industrial Average set new all-time record closes three days in a row, we shouldn't be surprised at across-the-board gains. A core sentiment that buoyed equities last week -- hopes that the Federal Reserve will continue its stimulus plan -- kept markets climbing. Clearly, smaller companies (the Russell 2000 tracks 2,000 of the smallest domestic public companies) were even happier to hear that news than the 30 large-cap companies in the Dow.

But the ETF tracking the famed Russell 2000 Index didn't just tear it up last week. In fact, its gains so far in 2013 are also unmatched by the other five ETFs we've considered.

Year-to-date performance:

Source: S&P Capital IQ

Why the disparity?
This has been a bullish year so far, as the government avoided the dreaded "fiscal cliff," the housing market shows definitive signs of recovery, and the employment landscape continues to improve.

However, while domestic business rebounds nicely, the uncertainty surrounding global commerce still restrains emerging markets. In February, the iShares MSCI Emerging Markets Index Fund saw outflows of $619 million, as investors worried about the sustainability of growth in China and Brazil, two of the most vital markets in the 21-market index. That's not to mention the political and economic uncertainty in Europe and the Middle East, another area of heavy exposure in the fund.

Diversify and prosper
Reinvesting dividends, the Russell 2000 ETF again outperformed the other ETFs over the past year, rising 17.2%. Not that you'd have done poorly if you'd just bought them all in equal portions a year ago -- you'd still be up 12%.

That said, the real magic starts to make itself known when you look back a little further: What if you'd had the foresight to invest in these six ETFs four years ago, at the trough of the market's lows? The short answer: You're smiling ear-to-ear right now. With annualized returns at a staggering 26.6%, you'd have a total return of 156.5%. With not a single of these ETFs failing to double in value, you're talking about a portfolio that has two and a half times more in it today than it did four years ago. 

Of course, similar results can be achieved by owning individual stocks. But the advantage of owning ETFs -- not to mention a slew of ETFs with exposure to different markets and types of companies -- is that you can trade them like stocks while remaining immune to company-specific risks.

For instance: Say Company XYZ sells a widget that somehow gains consciousness and starts digging up your neighbor's lilies. You'd probably be more upset than your poor neighbor if you happened to own XYZ stock. If, on the other hand, XYZ stock was merely one of hundreds of other components in an ETF you owned, you could sleep peacefully -- although you might want to keep a closer eye on your microwave.