Investing in ETFs: Check Out These Three for 2012

Since exchange-traded funds (ETFs) made their U.S. debut in 1993, they have grown to a market of more than $1 trillion.

Those investing in ETFs enjoy it because ETFs provide diversification to portfolios, are tax-efficient, come at a low cost, and are readily available.

ETFs are also appealing because you can find them at any time: they're bought and sold from brokerage firms and they trade on exchanges similar to stocks.

Another attractive aspect to ETF investors is when they exit the product, the shares are sold to an investor; the fund doesn't have to sell assets.

One investment adviser and decade-long ETF user, Mark Armbruster, told The Wall Street Journal, "From my perspective, it is the most compelling reason to use ETFs. If they're managed appropriately, there should never be capital-gains distributions."

Investing in ETFs in 2012

State Street Global Advisors, in a report titled 2012 ETF & Investment Outlook: Sinking or Swimming?, disclosed that U.S. ETFs gained more than $60 billion of inflows during the first five months of 2012, and 100 new funds had been launched by 17 unique providers.

Kevin Quigg, global head of ETF Strategy & Consulting at State Street Global Advisors, said of this year's ETF picture, "With concerns over job growth in the U.S. top of mind coupled with Europe's debt problems, investors continue to put their savings to work in ETFs that provide alternative sources of yield. If flows continue at this pace, 2012 will mark the sixth consecutive year that ETFs attract more than $100 billion in positive cash flows, which is remarkable given the trajectory of the markets during this period of time."

ETFs are also growing overseas. Swiss bank UBS (NYSE: UBS) last month introduced a record number 64 ETFs on the London Stock Exchange, setting a new one-day record for the exchange's launches, according to ETF Trends.

Recently, investors have been drifting toward ETFs emphasizing lower-volatility, stocks, dividends (along with other forms of high payouts), high-yield debt, and emerging-markets debt, according to a report by Morningstar analysts.

Investing in ETFs: Three to Consider

Anyone interested in investing in ETFs should start by considering these three:

PIMCO Total Return ETF (NYSEARCA: BOND): This ETF has been a big game-changer, blazing a trail for actively-managed ETFs and showing possibilities using strategies. This is the ETF version of the PIMCO Total Return Institutional (PTTRX) mutual fund. It has approximately 300 holdings versus the mutual funds' 19,000-plus. The fund doubled its asset base in less than two months, hitting the $2 billion-mark this week. Year-to-date, BOND is up 5.3%. Note: This ETF does not have swaps or derivatives.

iShares MSCI All Country World Minimum Volatility Fund (NYSEARCA: ACWV):This minimum-volatility ETF includes holdings in the United States and Japan as well as emerging markets. With low-volatility stocks outperforming the majority of international equity markets on a risk-adjusted basis, this is an inexpensive alternative for investors to participate in this market niche, according to ETF Trends. Its top holdings include Johnson & Johnson, Automatic Data Processing, and Enbridge.

In a bull market, this fund may underperform, but with its low risk and expense ratio comes decent returns that are risk-adjusted. Year-to-date, ACWV is up 8.3%.

Vanguard High Dividend Yield ETF(NYSEARCA: VYM): The chances of QE3 and more Europe debt woes increase the likelihood of money flowing into dividend-paying stocks - meaning VYM will climb. This fund has a low expense ratio and a low portfolio turnover ratio of 16% -- a sign that the portfolio managers believe in this fund's performance, according to Investor's Business Daily (IBD).

VYM has outperformed the S&P 500 by more than 10% since March 2009. The fund also offers a nice 3% dividend yield - which can be increased by writing call options. Year-to-date, VYM is up 7.9%.

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