Exchange-traded funds with an international outlook have enjoyed better returns than their U.S.-focused counterparts for several years now, a trend that Ratings staff has been monitoring since June 2003.

For the period ended Sept. 30, our models indicate that from the universe of more than 800 closed-end funds that we rate -- which includes some 195 exchange-traded funds -- the top four performers are focused squarely on Europe.

Those four ETFs, in order of their ranking, are the iShares MSCI Austria Index Fund (EWO) - Get Report, the iShares Belgium Index Fund (EWK) - Get Report, the iShares MSCI Spain Index Fund (EWP) - Get Report and the iShares MSCI Sweden Index Fund (EWD) - Get Report.

In addition to their European focus, these ETFs all carry a heavy weighting toward the banking sector in their particular regions.

Globally, the banking sector is performing well, and many of Ratings' top-rated funds have substantial holdings in the area.

Investors who want to diversify into the European region may look at taking a position in each of these country funds. More risk-tolerant investors might want to limit their holdings to the Spain and Sweden funds, thereby investing in the two fastest-growing economies.

An alternative approach would be exposure to the Swedish fund only.

Let's look at fund performance as of Oct. 12. The four ETFs seek to provide results that correspond to the price and yield performance of their respective MSCI indices, whose returns also are shown.

The indices track the broader market of each country.

Let's look at the sector allocations for each of these funds as of Sept. 30:

While the iShares MSCI Austria Fund is currently our top-rated ETF due to its superior three- and five-year performance, there is growing evidence that there will be a changing of the guard in the coming months.

As the tables show, the iShares MSCI Sweden Index Fund and the iShares MSCI Spain Index Fund are both recording better short-term results. So if that trend continues, it is likely that either Sweden or Spain would take the top-rated spot from Austria, and that Belgium and Austria would rank third and fourth, respectively.

These funds, as noted, generally track the economic performances of their countries of focus, so let's take a look at some statistics.

Spain has the biggest economy of the four countries, with a gross domestic product three to four times larger than the others, but Sweden boasts stronger economic figures.

Sweden's GDP growth rate is higher, its consumer prices growth is low, it has the highest federal budget surplus -- 2.2% of GDP -- and the highest current account surplus, at 6%. A jobless rate of 5.7% rounds out a very impressive set of economic statistics.

Sam Patel, CFA, is the manager of mutual fund research for the Ratings.

In keeping with TSC's Investment Policy, employees of Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Patel cannot provide investment advice or recommendations, he appreciates your feedback;

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