As the number of ETFs and ETF issuers grows at a breakneck pace and the focus of many products continues to narrow, it's a challenge to address methodology and liquidity when composing a portfolio. Simply comparing short-term performance among various ETF in any given sector often misses pitfalls such as liquidity and depth. Investors may find themselves paying up for a fast-moving ETF that looks good on paper but trades poorly in the open market.

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One response to these difficulties has been the emergence of several ETF mutual funds. While the transparency and low fees offered by ETFs have drawn some investors away from mutual funds, Paul Frank, who manages the

ETF Market Opportunity Fund

(ETFOX) - Get Report

, believes that the transparency of ETFs and the guidance of mutual funds can be combined effectively in a complex marketplace.

According to Frank in a recent

Fidelity Independent Adviser

interview, such a hybrid assists investors in tackling both security-specific and systematic risks, both of which ETFOX addresses."I am a student of Markowitz and the modern portfolio theory, which has helped me combat market risk by using ETFs," Frank said. "I am also taking security-specific risk out of the equation."

In the second half of 2008, Frank used

iShares Barclays 20+ Year Treasury Bond Fund

(TLT) - Get Report


iShares Barclays 1-3 Year Treasury Bond

(SHY) - Get Report

to achieve both short- and long-term exposure to the Treasury market.

At the beginning of 2009, ETFOX owned the inverse Treasury fund

UltraShort 20+ Year Treasury ProShares

(TBT) - Get Report

, a position that was increased in late January. Frank decreased his TBT position on February 10 but scooped up shares again in early March. Frank decreased his position again in mid-March but has been increasing his position in TBT since April 4.

Frank said he did not sell the entire TBT position in mid-March because it was a macro bet, had high momentum and had consistently stayed near the top of his longer term rankings.

While Frank allocates 20% to 25% of the fund to "opportunity areas," his current top holding is the large and liquid

PowerShares QQQ


, which tracks 100 of the largest domestic and international non-financial companies listed on the


based on market capitalization.

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The top 10 holdings in the QQQQ are currently


(AAPL) - Get Report



(QCOM) - Get Report



(MSFT) - Get Report



(GOOG) - Get Report


Research In Motion




(ORCL) - Get Report



(CSCO) - Get Report



(GILD) - Get Report


Teva Pharmaceuticals

(TEVA) - Get Report



(INTC) - Get Report


In terms of trading, Frank maintains that his turnover has ranged between 100% and 500%, but lately has been just below 100%. His monitoring has paid off in 2009 -- as the fund hits its five-year mark this April, it held a five star three-year


(MORN) - Get Report


As of June 1, the fund had outperformed the

S&P 500

by nearly 12%. As of May 31, ETFOX had a beta of 0.80. The table below lists the fund's holdings as of June 1.

Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers. Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years� experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.