Exchange-traded funds have revolutionized the way ordinary people invest. ETFs combine many of the best features of other types of investments. Like mutual funds, ETFs can give you a broadly diversified portfolio of stocks in a single package. Like individual stocks, they are liquid and easily bought or sold at any time during the trading day.

When it comes to international investing, ETFs really shine. Finding good foreign stocks that trade on U.S. stock exchanges can be challenging, and to invest in many promising foreign companies, you have to go to their home country's exchange to buy shares. With the exceptional performance that most foreign stock markets have had over the past several years, investors are scooping up shares of international stock ETFs at a fevered pace. Yet even though chasing performance is usually a bad reason to choose an investment, using ETFs to add international exposure to your portfolio makes a lot of sense.

The Vanguard Emerging Markets ETF (AMEX:VWO) focuses its investing on companies located in developing countries around the world, including Brazil, China, India, Russia, South Korea, and Taiwan. These countries offer higher levels of current and potential growth than do the markets of more developed countries such as England, France, Germany, and Japan.

Many professionals, including the Fool's own Champion Funds newsletter writer Shannon Zimmerman, recommend exposure to emerging markets for aggressive investors. And the Fool's newest investment newsletter, Global Gains, specifically targets foreign companies because of their potential for extraordinary growth.

However, with the potential for higher returns also comes higher risk. Many of these countries are going through significant political, social, and economic reforms, and a setback in those efforts could jeopardize your investments. Bolivia's nationalization of oil and gas resources earlier this year is jut one example of an action that can hurt outside investors.

The good news is that the Vanguard Emerging Markets ETF is broadly diversified both geographically and by industry sector. Although its top holdings include a number of natural-resources stocks, including Russia's Gazprom OAO and Lukoil (NASDAQ:LUKOY), Brazil's Petroleo Brasileiro (NYSE:PBR), and China's PetroChina (NYSE:PTR), you'll also find companies such as Indian technology giant Infosys (NASDAQ:INFY), Israeli drug company Teva Pharmaceutical (NASDAQ:TEVA), and Mexican cement maker Cemex (NYSE:CX). Overall, the ETF holds more than 850 companies, with no single country representing more than 20% of the overall portfolio.

On The Motley Fool's new CAPS service, which tracks the Fool community's thoughts on thousands of stocks and ETFs, sentiment for the Vanguard Emerging Markets ETF is almost universally positive. It gets the top CAPS rating of five stars, and 35 of 36 people pick it to outperform the S&P 500. Its low 0.3% expense ratio compares favorably with the high costs of many emerging-markets mutual funds, and as global investing becomes more popular, the stocks held by this ETF will likely benefit from increased demand. As a portion of a well-diversified portfolio, the Vanguard Emerging Markets ETF can be a great way to broaden your investment horizons and take advantage of the growth opportunities in some of the world's most dynamic economies.

CAPS is all about sharing your knowledge and learning from the knowledge of others, for the benefit of all. By looking at the opinions of your fellow community members, you can find great ideas for new investments and learn from the mistakes of others to avoid bad investing experiences. Joining CAPS is easy; all you have to do is sign up here. It's informative, fun, and best of all, free.

By the way, if you think this ETF is a great idea for 2007, be sure to click "outperform." We'll be announcing the winner of our Best ETF for 2007 contest on Monday.

Go here for the complete list of ETF contenders in our CAPS tournament. And for more information on exchange-traded funds, visit the Fool's ETF Center .

Fool contributor Dan Caplinger wishes he could travel to all of the countries in which the Vanguard Emerging Markets ETF invests. He doesn't own shares of VWO or any of the companies mentioned in this article. The Fool's disclosure policy covers the globe.