10 Best ETFs (Part 2)

Editor's note: This is Part 2 of the 10 Best ETFs series. To see Part 1, click here.

Picking the best ETFs is just as important as avoiding the most dangerous, which we featured over three days (Part 3, Part 2 and Part 1) last week. The top five exchange-traded funds do things right: capture their theme, provide liquidity and exploit the advantages of the ETF model.

New ETF products are flooding the market, but these top five funds have staying power. From inflation concerns to emerging-market opportunities, these funds address some of the most important themes in the financial world today.

Here they are:

5. iShares Nasdaq Biotechnology(IBB Quote)

Biotechnology is one sector that is tailor-made for ETF investing. Having the next big biotech drug is similar to hitting the lottery jackpot, and many start-up biotechs burn out before they hit it rich. These factors make it particularly difficult to pick the next stand-out biotech stock.

IBB is a large, liquid fund that gives investors exposure to a basket of biotechs, so that one biotech burnout won't sink your entire portfolio. Top IBB components such as Amgen (AMGN Quote) and Gilead(GILD Quote) weight the portfolio toward some of the biggest names in the business.

4. iShares Barclays TIPS Bond(TIP Quote)

While other ETF issuers are rushing to bring new inflation-protection products to the market, iShares' TIP is still an industry standard. TIP offers investors a low-cost approach to Treasury Inflation-Protected Securities (TIPS), tracking securities that range in duration from one year to 20 years.

Individual TIPS bonds are taxed on inflation adjustment, making TIP a more efficient way to access these securities. TIP distributes any inflation-adjustment as income, rather than taxing individuals on a noncash event.

Over 1 million shares of this fund trade each day, so investors can be confident that they can enter and exit the fund with ease. TIPS are a great way to diversify your portfolio, and TIP is one of the best ways to do it.