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10 Diversified ETFs

If you were expecting that the list of highly diversified ETFs would be dominated by large-cap funds, you are in for a surprise. The largest grouping on the list, with four representatives, is the small-cap category of funds. Two of the small-cap funds earned grades from Ratings in the "B" range, which equates to a "buy" recommendation, while the remaining two were "sells" in the "D" range. The differences are a result of variances in volatility, which, along with total investment return, is a factor in determining the ratings grades.

Two of the diversified mid-cap funds earned grades in the "C" range for "hold" recommendations, and one climbed into the "B" bracket. The lone large-cap fund held a C-plus, or "hold" grade.

The roster of sector diversification champions really gets interesting when looking at the two members with investment focus extending outside the U.S. As for the single truly foreign (no U.S. holdings) member of the group, one might wonder how a fund with only 50 holdings could be considered diversified. Yet the European holdings of ETF Dow Jones Stoxx (FEU) were able to touch each of the 12 sectors needed to qualify for the list.

Whereas eight of the funds on the roster invest most heavily in the financial sector and one in consumer cyclicals, the Stoxx 50's biggest sector is the "miscellaneous" grouping, which by itself implies additional diversification.

While most of the lightest holdings for the group are in transportation, communications services or the miscellaneous sector, the ETF's lightest sector is energy, which would seem to be a rather good sector to avoid considering the recent drop in energy prices. The fund rewarded its investors with a total return of 26.67% in 2006, top of our funds list by a comfortable margin. That helped it earn a B-minus "buy" grade from Ratings.

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