What These Top ETF Picks Predict for 2012

This article is part of ourBest ETFs for 2012series, in which we're seeking out the top-performing ETFs for the coming year.

Today, we're wrapping up our series on the best ETFs for 2012. Over the past two weeks, our Fool contributors have shown you a strong set of exchange-traded funds, each making the case that prospects look good for the stocks their respective ETFs own. For a review, you can click here to see a full list of ETFs and links to the articles that discuss each one.

If all you do is take those picks and build them into your ETF investing strategy, then the series has served its purpose. But I think that you can get even more insight by taking a bird's-eye view of the picks on the whole and looking for trends and patterns that could help you with all of your investing.

4 trends from our top ETF picks
Specifically, I've found four trends that I think are worth noting. They're applicable to the ETFs themselves, but they may also guide how you choose individual stocks as well.

1. Dividends are still king.
Lest you have any doubt, dividend stocks are still incredibly attractive for investors. With their unique combination of growth potential and current income, dividend stocks are filling a need that investors can't get from alternatives like bonds and other fixed-income securities these days.

Fully three of the nine ETFs our experts picked are specifically designed to hold dividend stocks. And my pick, while not having the word "dividend" in its name, focuses its attention on Annaly Capital (NYS: NLY) , American Capital Agency (NAS: AGNC) , and other top-yielding mortgage REITs. With fears of a slowdown and a choppy stock market so far in 2011, investors aren't taking capital appreciation for granted -- they want income they can touch right now.

2. Broader is better.
When this series started, I fully expected to get a bunch of sector ETF picks designed to take advantage of particularly attractive industries. I even thought one or two picks might venture into leveraged ETF territory, despite the danger of using such funds for a yearlong time horizon.

But the lion's share of ETF picks were actually broad-market funds covering a wide swath of the markets they targeted. Whether it's emerging-market stocks like Baidu (NAS: BIDU) and Sina (NAS: SINA) , or the biggest companies in the U.S. market, the picks reflect a desire to diversify rather than making concentrated bets.

That may have something to do with the failures of some well-regarded mutual fund managers this year with their focused funds. Taking big bets can pay off, but it can also cost you if you're wrong. Sometimes, tracking the indexes is all you really need.

3. Cost is key.
In the ETF universe even more than with mutual funds, fees are often the only differentiator among several similar ETFs. Our picks largely reflected the tendency toward minimizing fees, although some of the sector funds had higher fees than the broadest-market index trackers.

With commission-free ETF trading available from a range of brokers, the annual expense ratio becomes one of the most important ongoing costs of ETF investing. By sticking with low-cost funds, you can add thousands of dollars to your eventual retirement nest egg without doing a thing.

4. Fear is still out there.
Among the few targeted sector picks, you can tell a bias toward caution for the general market. Mortgage REIT health almost entirely depends on a weak economy to keep interest rates low, while silver stocks could benefit just as much from a meltdown of the monetary system as they would from stronger industrial demand.

Even biotech stocks are somewhat of a contrarian play on the economy. Most biotech startups depend much more on their own individual drug pipelines and M&A activity than on macroeconomic conditions. All you have to do is look at the fortunes of companies like Pharmasset (NAS: VRUS) , Dendreon (NAS: DNDN) , and Inhibitex (NAS: INHX) to see how that phenomenon has played out over time.

Invest smarter
Exchange-traded funds can make your life a lot simpler as an investor. But making sure you find the best ETFs can make it a lot more profitable, too.

That's why you shouldn't just stop with these ETF picks. To get more great ETF ideas, join the thousands of readers who've looked at the Motley Fool's special free report on ETFs to learn about three ETFs that could soar in the next recovery. There's no cost or obligation, but this report won't be available forever, so read it today.

We hope you enjoyed our series on the Best ETFs for 2012.Click back to the series introfor links to the entire series.

At the time thisarticle was published Fool contributor Dan Caplinger likes to keep things simple. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Dendreon and Annaly Capital Management. Motley Fool newsletter services have recommended buying shares of Sina, Baidu, and Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy gives you its best.

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