Best ETFs in 2010: Some surprises

February 14, 2011

Traders work on the floor of the New York Stock Exchange November 8, 2010.    REUTERS/Brendan McDermid Other than gold- and silver-based exchange-traded funds (ETFs), which funds produced the best returns last year?

A reasonable guess would be that anything invested in precious metals did well in 2010. You’d be right, but less-glamorous ETFs investing in Peru, Thailand and Colombia also made the top 10 of ETF Trends’ top-performing list .

I know these countries are hardly on most investors’ radar screens. And I certainly don’t endorse you jumping into these funds now because you won’t get last year’s returns. A broad-based approach, though, will serve you well.

Peru and Colombia make a lot of sense to me and will continue to prosper. Both are resource rich and feature growing economies. That’s why the iShares MSCI Peru fund returned 57.2 percent last year and the Global X/InterBolsa FTSE Colombia fund rose 52.7 percent.

Tiny Peru has one of Latin America’s fastest-growing economies. At eight percent growth last year, it’s keeping pace with China. Colombia, along with Peru, is building a larger middle class and benefiting from resource wealth.

While these Andean countries have been devastated by civil wars and poverty throughout most of their history, they have stabilized politically. They also are in demand for their mined resources.

China, India and the rest of the developing world are paying top dollar for their copper, silver, gold and other commodities. Colombia features the largest coal reserves in Latin America and is also endowed with petroleum and natural gas.

Thailand, which has also been beset by political strife, has benefited from a strong export economy and a strengthening currency. It’s a big producer of tin, rubber and natural gas .

The iShares MSCI Thailand ETF, gained 53.3 percent last year as the former Siam is claiming its share of South Asian growth.

Most of the mainstream business media, however, has been pounding away at the idea of investing in the BRIC countries (Brazil, Russia, India and China), an investment strategy originally promoted by Goldman Sachs . Although it’s hard to argue that these countries will account for the lion’s share of growth among developing countries, it’s a mistake to ignore entire regions or countries that may not get as much attention.

There are some trends that are hard to ignore. Did you know that as a group, Latin American stocks had the best returns among any region over the past decade? According to a recent T. Rowe Price study, Latin equities rose 21.4 percent.

What if your portfolio was just invested in U.S. stocks through the S&P 500? Would you be satisfied with a 1.4 percent return during that period?

Before you go out and place all your chips on Latin America, keep in mind that the region has historically been politically volatile. Mexico is still fighting a drug war and most of the countries south of the border don’t have a long tradition of democratically elected governments. I’m not making any predictions.

Should you choose to invest in Latin America, consider it a small allocation — less than 10 percent of your portfolio. I’d suggest a broad-based fund such as the SPDR S&P Emerging Latin America ETF.

A much more inclusive strategy is to invest in all emerging markets through a fund such as the Vanguard Emerging Markets ETF. That way, you could spread your money from Argentina to Zambia. It would take the guesswork out of predicting which emerging economies will perform best in the future.

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