The Top ETFs Over Three Years Represent an Eclectic Group

The best-performing exchange-traded funds (ETFs) of the past three years would comprise an eclectic mix if combined into a single portfolio. Precious metals, retailers, health care companies and a mid-cap growth index would all be represented.

I compiled the list as an experiment to see what a long-term, top-performing ETF portfolio would look like. Each March, we publish a list of the mutual funds with the best five-year performance (see “The Top Funds Over Five Years: Gold, Emerging Markets & Diversification Lead” in the March 2011 AAII Journal). Given the growth in ETFs, I thought there would be interest in a similar list involving exchange-traded funds.

Keep in mind that this is not a direct comparison. Most ETFs have not been around for five full years, requiring the use of three-year performance results instead. There is also the issue of active versus passive management. Many mutual funds have managers who not only select the investments to hold, but also determine when to buy and sell those investments. Most ETFs, conversely, are designed to track an index, therefore eliminating the performance advantage attributable to a good fund manager.

On the other hand, mutual fund performance is often influenced by both broad market and category-specific trends. ETFs are also influenced by these same trends. Thus, there is some overlap between performance of mutual fund and ETF categories. Furthermore, my expectation is that more actively managed ETFs will be introduced over the next several years. Thus, it is interesting to start looking at the long-term performance of ETFs.

However, fund analysis involves more than just looking at total return. Performance relative a fund’s peers, the composition of the fund, the strategy used, expenses and size are all important factors for ETFs. Proper diversification is also very important; you need to seek out the fund or security that best fulfills your diversification needs.

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