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Fund Spy

ETFs for the Road Less Traveled

Three ideas that keep you off the bandwagon.

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A good portion of the exchange-traded-fund community has been abuzz recently with talk of the newest new things: namely, ETFs focused on gold, China, and dividend-paying stocks. Some of those new funds have attracted a lot of assets in a short period of time, but it remains to be seen if they can live up to the attention they have attracted.

Often, the latest bandwagon offers a quick trip to disappointment (think Internet funds in 2000). That is not to say the latest new funds are due for a fall, but to point out that there may be as good or better options in areas that aren't as popular. Granted, there are fewer contrarian opportunities now than there were in the late 1990s, when a huge disparity developed between so-called "old economy" and "new economy" stocks. Still, across-the-grain investors can find some ideas, and ETFs to put them to use, if they look closely. The following notions are not sure things and should be employed within the context of a diversified, long-term portfolio, but they are worth exploring.

Vanguard Growth VIPERs  (VUG)
The large-growth category has eaten the dust of the average value fund on an annualized basis over the past five years. Such divergences don't last forever, a fact that has not been lost on many veteran fund managers. The team that runs  Dodge & Cox Stock (DODGX), for example, added large-growth stocks to their portfolio earlier this year. No one can predict for sure when the growth/value gap will close, but ETF investors can use this fund to take advantage of the eventual reversion. There are older, large-growth ETFs, but none cheaper than this one, which has a 0.15% expense ratio. The fund's bogy, the MSCI U.S. Prime Market Growth Index, also may do a better job capturing the return of the large-growth universe and reducing turnover than other indexes. That's because it uses a quantitative, multifactor construction methodology and allows some overlap between market-cap and style boundaries.

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.