THE year has just begun and many of you are still reviewing your portfolios with the goal of maximising your returns in 2011. In an economy where interest rates continue to trend downwards and consumer spending remains constrained, you may be challenged by how to turn a “mickle” into a “muckle”.

Having the financial expertise to sift through the barrage of investments available may be your biggest obstacle and you may not be aware of the variety of options available. While risk averse investors may still find government paper attractive, if you are a more aggressive investor you may want to venture into more exciting and potentially higher earning instruments. Let’s say you think technology is a booming industry but you aren’t comfortable with committing your money to one particular company, what are your options?

While mutual funds may be the traditional route to gain exposure to this and other industries, Exchange Traded Funds (ETFs) provide some flexibility you may find attractive. As the name suggests, an ETF is traded on an organised exchange such as the New York Stock Exchange (NYSE), just like stocks. However, what distinguishes an ETF from a typical stock is that it is a hybrid security that tracks an index, a commodity or a basket of assets. There are ETFs to represent virtually any segment of the market, from equities and bonds to Real Estate Investment Trusts (REITs), and even the utility sector.

To put this into perspective, if you wish to gain exposure to the benchmark Standard & Poor’s (S&P) 500 Index, rather than purchasing each of the 500 stocks that make up the Index, why not make one purchase and invest in the SPDR S&P 500 ETF (NYSE: SPY). SPY tracks one of the most closely watched stock market yardsticks — the S&P 500 Index. Other popular equity index ETFs are SPDR Dow Jones Industrial Average ETF (NYSE: DIA), formerly Diamonds Trust, which follows the benchmark Dow Jones Industrial Average (DJIA) and Powershares QQQ (NASDAQ: QQQQ), which reflects the Nasdaq-100 Index and is nicknamed the “cubes”.

As the developed world slowly climbs out of the recession, many emerging markets, such as China and Brazil, are experiencing rapid growth. Emerging market equity ETFs finished last year second only to North America as the most popular regional asset class on a global basis. In an always competitive category, the big winner in 2010 was the iShares MSCI Thailand Index Fund (NYSE: THD), which gained more than 55 per cent and was 15 per cent more than any other fund. Similarly, the iShares MSCI Emerging Markets Index (NYSE: EEM) has gained as much as 28 per cent year-over-year (yoy). EEM is one of the most popular and best-performing emerging market ETFs and holds over 320 emerging market stocks in its portfolio, including some of the largest international companies in multiple sectors such as financials, energy, and technology.

On the back of this emerging market growth has been increased demand for commodities, which range from precious metals to agricultural products. Expectations for gains in commodities have increased on speculation that the US Federal Reserve’s stimulus programme will further weaken the US currency as economic growth accelerates, boosting the attractiveness of raw materials, which are priced in US dollars. As a result, commodity prices surged throughout 2010 and into 2011. Moreover investors continue to look to commodities as a “safe haven”. Consequently commodities have been gaining importance among asset classes and ETFs have been a great way to gain exposure.

iShares Silver Trust ETF (NYSE: SLV) was among the top performers in 2010, surging 80 per cent as silver prices soared. Likewise SPDR Gold Trust (NYSE: GLD), the biggest ETF backed by the bullion, climbed 30 per cent as Gold prices reached record highs. In the energy sector, Energy Select Sector SPDR (NYSE: XLE), which tracks the price and yield performance of energy companies within the S&P 500 Index, surged 37 per cent year-over-year (yoy). Likewise, PowerShares DB Energy Fund (NYSE: DBE) based on the Deutsche Bank Liquid Commodity Index – Optimum Yield Energy Excess Return advanced 19 per cent yoy. Looking at agriculture, PowerShares DB Agriculture Fund (NYSE: DBA) which reflects the performance of the DBIQ Diversified Agriculture Index Excess Return climbed 36 per cent yoy.

So are ETFs a good match for your portfolio? ETFs are excellent vehicles through which you can benefit from higher returns and diversify, as one transaction yields exposure to a broad index or sector. ETFs also offer great flexibility, in terms of trading, as they can be purchased at any time on any given trading day and have no minimum requirements. As well as being simplistic investments, ETFs are cost-effective when compared to mutual funds. Due to the fact that purchasing an ETF is usually one transaction, fees and commissions are usually less. Likewise, there is no management fee and there are no “loads” to purchase and redeem shares. ETFs however do carry a bid-ask spread as well as a regular commission, similar to equities.

ETFs are simple in structure and easy to understand and given their many advantages, investors looking to diversify, hedge against risk and increase overall portfolio return should consider these investments.

Deirdre Witter is an Investment Analyst at Stocks & Securities Ltd. You can contact her at dwitter@sslinvest.com.