Last month, we put together a theoretical portfolio of 10 exchange-traded funds we liked from a coverage universe of nearly 200.

Overall, our picks have performed as we had hoped, with the theoretical $10,000 portfolio returning 4.3% in November, compared with 2.7% for the S&P 500.

As the following chart shows, the energy and emerging markets and REIT ETFs in our model momentum-portfolio were the three leading contributors to performance in November, while the laggard holdings included utility, global financial and large cap-value ETFs.

(To qualify for this portfolio, the selected ETF had to have an overall score in the top 30th percentile from our ratings model, which takes into account the total return to shareholders, the timeliness of the investment, and price volatility. We chose investment styles based on the number of highly rated funds in the group and recent performance trends.)

So what changes are we suggesting for December?

Quantitatively speaking, more of the same.

Skeptics will say that one month does not a trend make, and rightly so.

But rather than specific recommendations, this theoretical portfolio is designed to help you make better investment decisions.

This month we are increasing exposure to broader international markets and currencies, selling iShares MSCI Spain ( EWP) and buying iShares MSCI Value Index ( EFV).

This is a short-term shift.

While our interest in the Spanish economy has been sparked by acquisition talks, it is likely that this deal-driven market may cool off over the next few months.

We suggest adding the MSCI Value Index because it provides exposure to Japan and United Kingdom through its holdings in HSBC ( HBC), Toyota ( TM) and Royal Bank of Scotland ( RBS-PP).

The Long ETF Portfolio's Performance in November
Energy, emerging markets and REITs were biggest contributors
ETF Ticker Units Amt 11/31/06 Price End Value Gain/Loss (%)
iShares MSCI Spain EWP 19 956.65 53.1 1,008.90 5.50%
streetTRACKS Gold Shares GLD 16 981.76 64.39 1,030.24 4.90%
iShares Russell Mid Cap Value IWS 7 984.34 146.2 1,023.40 4.00%
iShares S&P Global Financials IXG 11 946.66 87.94 967.34 2.20%
iShares S&P Global Telecom IXP 16 970.24 62.18 994.88 2.50%
iShares Dow Jones US Energy IYE 10 956.4 104.73 1,047.30 9.50%
iShares Morningstar Large Value JKF 12 962.28 82.15 985.8 2.40%
Utilities HOLDRs UTH 7 910.7 130.93 916.51 0.60%
Vanguard REIT ETF VNQ 13 984.75 79.99 1,039.87 5.60%
Vanguard Emerging Markets ETF VWO 14 986.86 75.72 1,060.08 7.40%
Holdings Subtotal 9,640.64 10,074.32 4.50%
Cash 1 359.36 359.36 0.00%
Total 10,000.00 10,433.68 4.30%
S&P500 (SPY) $140.53 2.70%

This theoretical portfolio is limited to 10 positions. But for those who can hold more, two other alternatives would be iShares S&P Europe 350 ( IEV) and iShares FTSE/Xinhua China 25 ( FXI).

We are also moving out of mid-cap ETFs and into small-cap and micro-cap ETFs to gain exposure to underfollowed, undervalued stocks. We sold iShares Russell Mid Cap Value Index ( IWS) and bought the much smaller iShares Morningstar Small Core Index Fund ( JKJ). This too is a short-term shift aimed at capturing a potential upward movement in small cap stocks at the end of the year.

For those who fundamentally resist owning small stocks, note that we are still keeping iShares Morningstar Large Cap Value ( JKF), which contains household names such as Exxon Mobil ( XOM), Citigroup ( C) and Bank of America ( BAC).

Finally, we are adding more energy, selling streetTracks Gold ( GLD) and substituting iShares Canada ( EWC).

Our model has turned neutral on gold near-term, given the run-up in its price so far this year and the high level of volatility the precious metal has displayed recently.

Gold bugs need not despair, however. The holdings of this highly rated Canadian ETF include Barrick Gold ( ABX CN) and Agnico-Eagle ( AEM CN). While iShares Canada also could be considered a non-U.S. investment, the proximity and by some measures the correlations between the U.S. and Canadian markets are very high.

Of all the decisions, this last one was the most difficult. It is tempting to swap streetTracks Gold for iShares Silver Trust ( SLV) and play the year-end seasonality of this precious metal, particularly because the latter outperformed in November. iShares Silver returned 12.2% during the month, vs. 4.9% for streetTracks Gold. The big hang-up here is our requirement that an ETF must trade for at least 12 months before it can be rated. Those who don't have this constraint may want to look to consider iShares Silver as an alternative.

So now here's what the rebalanced portfolio would look like:

Style Best ETF Ticker 12/1/06 Price Units Amt Rating
Non-US Equity ISHARES MSCI VLU IDX* EFV 70.29 14 984.07 A+
Non-US Equity ISHARES MCSI CANADA FD* EWC 25.77 39 1,005.03 A-
Sector - Financial Services ISHARES GLOBAL FIN IXG 87.16 11 958.76 B+
Global Equity ISHARES S&P GL TELEC IXP 61.76 16 988.16 A
Sector - Energy/Natural Res ISHARE DJ ENRGY SC IYE 105.21 10 1,052.10 A+
Equity Income ISHARES MRGSR LGVLIX JKF 82.09 12 985.08 A+
Growth - Domestic ISHARES MRGN SM CORE* JKJ 86 12 1,032.00 A-
Sector - Utilities ML UTILITIE HLDR1240 UTH 131.21 7 918.47 A
Growth & Income VANGUARD SF REIT ETF VNQ 79.84 13 1,037.92 A-
Emerging Market Equity VANGRD EMRG MKT ETF VWO 75.22 13 977.86 B-
Holdings Subtotal 9,939.45
Cash 60.55 1 60.55
Total 10,000.00
Market Index S&P500 (SPY) 140.22
* New additions

What are the risks and lessons here? Every professional money manager starts his day with the clear understanding that all trades will be wrong in some fashion -- either too much of a bad choice or not enough of a good thing.

Last month, avoiding bonds and biotechs worked. What did not work was the volatile, tech-laden iShares MSCI Taiwan ( EWT). While the fund appreciated 10% during the month, contributing to the portfolio's positive return, this kind of price action is more suitable for a day trader than for a portfolio that is rebalanced monthly.

Another important lesson is the importance of investing overseas. While our model ETF portfolio benefited from its international exposure, international ETFs were clearly "the one that got away" for many U.S. investors last month. The challenge here for you is to gain an appropriate level of comfort with global markets and decide on a suitable investment vehicle. You should certainly consider international ETFs. Start small. International funds are no longer a "nice to have," they are now a "need to have."
Rudy Martin is the director of research for 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.

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 Martin cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.