It’s no coincidence that the rising popularity of exchange-traded fund (ETF) investing coincided with the rise of investor-empowering online-trading platforms such as E*Trade.

It was the mid-to-late 1990s, and the Internet’s new inroads to Wall Street were stirring a new confidence in investors. But these eager new traders didn’t have the time or experience to pour through mountains of statistics and analysis like full-time brokers.

Also at the same time, the markets began to open, allowing Wall Street firms access to overseas stocks that were previously hands off, said Horacio R. Marquez, a Money Morning contributing editor and an emerging-markets specialist.

Enter ETFs, index-tracking funds that can be bought and sold like stocks. Many times, ETFs represent a group of related stocks – such as agriculture or commodities – or stocks from another country that investors couldn’t normally buy individually.

For example, Brazil’s top-rated ETF, iShares MSCI Brazil Index (EWZ), is a pool of Brazilian stocks that aims to parallel the performance of the country’s publicly traded securities.

Among their advantages, ETFs trade like stocks during the day and they don’t require a ton of money.

"Another advantage of doing that is you’re not hit with an unexpected loss in just one of the stocks," Marquez said. "ETFs allow you to focus your strategy on the most important component of profits, which is asset allocation."

Three Key Elements

In 1993, Standard & Poor’s launched the first ETF, called S&P’s Depository Receipts (SPDRs). Today, its bread-and-butter ETF [and biggest ETF by size], SPDR S&P 500 (SPY), seeks to correspond generally to the price and yield performance of the S&P 500 Index.

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Morgan Stanley (MS) soon entered the fray with its own ETFs, as did Barclays PLC (BCS) and Vanguard.

As of January, there were 1,173 ETFs listed on exchanges in the United States, Latin America, Europe, Asia, Australia and South Africa. A Middle East ETF is expected to launch later this year.

The range which ETFs encompass is remarkable. ETFs are available for nearly every sector – from Nuclear Energy, Financials, Health Care, Utilities, Aerospace & Defense, Real Estate, etc.

The menu of commodity-specific ETFs includes gold, silver, platinum, steel, petroleum and more.  

To say investors have a plethora of choices in an understatement. But the sheer variety of ETFs can confuse the good with the bad.

Marquez offers three pointers to picking winners:  

• Look for ETFs that replicate the index they are supposed to follow. "For that to happen, they have to trade in liquid markets," he said. If the market’s illiquid, the ETF will trail as the market rises and follows, which in turn skims profits. 
• Look for ETFs run by the top fund families, such as Barclays, Vanguard and State Street Corp. (STT).
• Most importantly, as mentioned earlier, the best ETFs offer asset allocation but also in the right country or sector. Just ask investors who own streetTRACKS Gold Trust ETF (GLD), which has gained more than 49% in the past year on the back of gold’s meteoric rise.

The Best of the Best

However, prospective ETF investors don’t have to look too far to find value. Among the best-selling ETFs are a handful that have a history of solid performance and/or bright prospects over the short, medium and long term.

Marquez first mentioned financial ETFs, such as Financial Select Sector SPDR (XLF), whose trading prices have cratered from liquidity and credit crunches.

"The situation is going to turn around, not only recover but thrive. Most of the losses are behind us and these are the companies to buy for the medium and long-term," Marquez said. "But if you expected to get rich tomorrow, then forget about it."

Oil-targeting ETFs, such as Oil Service HOLDRs (OIH), serve to gain as the price of crude is expected to rocket even higher this year. 

Perhaps the most intriguing are emerging market ETFs that reflect the gains of another country’s stock index:

• Brazil: iShares MSCI Brazil Index (EWZ)

• Russia: Market Vector Russia ETF Trust (RSX)

• India: Wisdomtree’s India ETF (EPI)

• China: iShares FTSE/Xinhua China 25 Index ETF (FXI)

Claymore’s BRIC ETF (EEB) averages the stock market gains of all the above emerging markets, collectively referred to as BRIC. 

Or more broadly, iShares MSCI Emerging Markets Index ETF (EEM) aims to capture 85% of the (publicly available) total market capitalization of overall emerging market stock performance.

News and Related Story Links:

• Money Morning:
  Middle East ETFs Will be Available "This Year"

From Staff Reports

China Shenhua Energy Co., China’s largest coal producer, plans to raise 66.6 billion Yuan ($8.9 billion), in the biggest share sale in China in 2007.

The initial public offering will sell about 1.8 billion shares on the Shanghai market for 34.99 Yuan to 36.99 Yuan a piece, the company said in a statement. The date for the IPO hasn’t been announced, though the money will finance expansion.

News of the sale sent the company’s shares on the Hong Kong market up 6.6% to a record HK $46.15 by close. And more gains are expected to follow when the Shanghai IPO takes place. Bloomberg News reports that the last six companies to hold mainland IPOs have seen their shares jump an average of 250% on their first day of trading.

That’s likely to be the case for PetroChina, the country’s largest oil and gas producer. China’s securities regulator announced yesterday (Monday) that it gave PetroChina the green light for an estimated $5 billion IPO on the Shanghai exchange. Proceeds from the IPO will expand refineries and boost output at oil fields.

Shares of PetroChina (PTR) on New York Stock Exchange leaped a cool 8.31% (or 13.9 points) on Monday following the news. In the past month, they had gained 25.26% (or 36.52 points).

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It’s Friday morning, and the $900 million ‘Mystery Trade’ that I’ve written to you about several times recently expires today.

This trade, which has been cause célèbre on the Internet, especially in chat rooms frequented by conspiracy theorists, will likely expire having served its purpose as a below-market-rate financing mechanism for some investor or institution. And that’s a good thing, because it proves that even unusual activity can have a perfectly rational explanation, even if the circumstances surrounding it remain an enigma.

For those of you who are reading about this admittedly fascinating situation for the first time, let me take a moment and give you a quick overview.

The Lowdown on the ‘Doomsday Trade’

On Sept. 5, anonymous parties agreed to buy and sell 120,000 September (SPY) call options using deep-in the-money strikes ranging from 60 to 95. Now, if you’re not options savvy, don’t worry. SPY, also referred to as a “Spider” in trader parlance, is an exchange-traded fund (ETF) that mimics the performance of the stock market’s closely watched Standard & Poor’s 500 Index (INX).

So, why all the fuss? Viewed at face value, this trade looked to many investors like someone was making a big bet that U.S. stocks were in for a huge tumble, almost as if whomever placed these trades “knew” something ominous was afoot. At the time, the S&P 500 was trading at roughly 1470. From this vantage point, these strike prices equated to the S&P dropping from that level all the way down to a range between 600 and 950 for a decline of between roughly 36% and 59%.

[From current levels of about 1518, we’d now be talking about a decline of between 40% and 63%.]

When these trades were viewed from that vantage point, they certainly were fear inducing.

But as a professional trader, I could see that it was very possible these were set up as a so-called “box-spread trade.” This is a highly specialized transaction that professional traders or sophisticated institutional investors use on occasion to “box” in the market and guarantee profits, risk or, as may be the case with this trade, financing.

Without boring you with the details, here’s what you need to know about how this type of trade works. Basically, the counterparties, in this case a buyer and a seller, agree to a trade at a price that essentially splits the difference between current interest rates or prices. The price the trade takes place at is really is a moot point.

What’s important to understand is that the seller benefits because they essentially get to borrow the money from the buyer at a slight discount to prevailing market rates, while the buyer is able to keep his money moving in what is essentially a cut-rate loan at a time when he probably can’t lend it to others at all and risks it standing still the kiss of death for a financial firm that depends on its liquidity for daily operations.

As it turns out, that is just what it apparently has turned out to be… a box-spread trade of some type.

As I’ve mentioned before, we were the first news service to report these trades; until we did so, news of the options deals had been confined to websites and chat rooms. But once we reported the story, scores of other media organizations began talking about the options deals, too. These media organizations seemed to fall primarily into one of two camps in terms of how they interpreted the trades:

• The first group, the majority of the media folks, agreed with my take that there had to be a logical explanation for the trades.
• The second group, the minority, couldn’t let go of the theory that there must be a more-sinister motivation.

Speaking of which, the odds are very high that we’ll never know who placed the trade, or exactly why they did it, but for the most part that’s irrelevant anyway.

But at the end of the day, the really vital thing to understand about this trade is that the capital markets worked the way they were supposed to and at a time when there was unprecedented potential stress, thanks to a worldwide liquidity shortage stemming from the subprime-mortgage mess.

That’s actually a very big deal. Personally, I find that reassuring, and I hope you do too.

A P.S. from the author: As of press time today (Friday), I’ve seen no evidence that this trade was rolled into subsequent months. But the day as they say in those great old cowboy Westerns “ain’t over, yet.” Rest assured that I will be watching vigilantly and that I’ll make sure to keep Money Morning subscribers informed.

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But it’s been a fascinating and rewarding experience. As a relatively new news organization, not to mention one with a highly specialized focus, it’s been very gratifying to actually experience a major news “scoop” so far ahead of our newsgathering rivals. When you look at the related links, you’ll see that our original report appeared first thing in the morning on Wed., Aug. 29. But as you’ll see from everything we’ve posted here, the other news organizations didn’t start running their stories until Wed., Aug. 30.

I mention that only to underscore that, as a Money Morning subscriber, you can be assured of getting news and investment ideas before everyone else.

One of the ways we do that is by tracking money flows, hence the name of our monthly sister publication, The Money Map Report. And I’m sure it’s no surprise to you that much of those money flows are flowing into – or out of – China.

If you’re just starting to add international investments to your holdings, or want to invest some money in China, consider either a very good Exchange Traded Fund (ETF) that’s investing in Asia, or even better directly into China.

That will provide you the long-term benefits of China’s continued explosive growth, while also giving you the diversification needed to rise out that economy’s inevitable swings. One top-performing mutual fund is the China Region Opportunity Fund (USCOX), which is managed by U.S. Global Investors Inc. (Nasdaq: GROW) – a great example, by the way, of a company that will be profiting indirectly from China.

I mention the China Region Opportunity Fund and U.S. Global Investors because the fund-management firm is well run, and its funds are well managed. The company is a favorite of several of our analysts – myself included – here at Money Morning.

But if you’ve already got a start on your Asia and China investments, and are looking for something more sophisticated, you’ll want to read our new investment-research report. Our team has several profit opportunities that are related to the growth in China, as well as the rest of Asia. These profit opportunities are poised to benefit from the growing global commodities boom, and to the capital that’s needed to finance the industrial development taking place on that side of the world.

In fact, our worldwide research team has identified $867 billion worth of industrial investments that will be flowing through the global financial markets, and that are aimed at development initiatives in such key sectors as agriculture and biotechnology, telecommunications, energy and finance. Our analysts have labeled this confluence of capital as “The Big Money Bang.”

That $867 billion is about to rock the markets, fueling bigger profits than gold, telecom, and the Internet combined. Investors who tap in now are about to pocket $1.54 million in the next 18 months.

The “Big Money Bang” will create countless investment opportunities. But we’ve singled out the best four, many of them keyed to some of the trends discussed below. They include:

• A financial institution so tied into Asia’s booming development that we’ve nicknamed it “The One Stock You Can Retire On.”
• A commodities-related company with ties to both agriculture and biotechnology whose product is provided by so few firms that it’s actually “more precious than oil.”
• A power-provider involved in a $40 billion energy venture that’s central to China’s continued ability to grow.
• And others.

[To get the details on the companies we’ve mentioned in this free report, click here.
You’ll be glad that you did.]

Related News and Story Links:

• Money Morning Investment Analysis: This $900 Million Bet Has Global Traders Talking.
• ‘Air America Radio.’
• Bizradio.com
• The Street.com TV Interview Video Clip:
  ‘Bin Laden’ Trades Stir Terrorism Fears.

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I wrote to you recently about an unusual series of S&P 500 Index (SPY) options trades worth $900 million or more – give or take a few zeros.

In fact, as it turned out, we were one of the first – if not the actual first – mainstream news organizations to write about these trades, which were being talked about at length in the global community of professional traders that I’m part of [More on our "scoop" momentarily].

Not only were the trades unusually large, but their placement so close to the September expiration and the fact that they were so deep in the money made them a complete enigma. Add in the fact that none of the parties to the trade were talking (a puzzler, too, as the trading community typically loves to talk) and you’ll understand why this story quickly rivaled the alleged 1947 UFO crash in Roswell as a topic of interest and a focus of conspiracy theorizing.

According to my research, anonymous parties agreed to buy and sell 120,000 September (SPY) call options using deep-in the-money strikes ranging from 60 to 95. Now, if you’re not options savvy, don’t worry. SPY – also referred to as a “Spider” in trader parlance – is an exchange-traded fund (ETF) that mimics the performance of the stock market’s closely watched Standard & Poor’s 500 Index (INX). These strike prices equate to a SPY trading between 600 and 950, or roughly 35.81% to 59.46% below where the security was trading when I broke the news of the trade back in August.

As a longtime professional trader, my own take at the time was significantly less ominous than some of those posted on the message boards, where some had dubbed these as the ‘Doomsday Plays’ or the ‘Bin Laden trades.’ Others questioned how other professional traders and I could even consider trading this “trade.” And when other mainstream media organizations followed our lead and began reporting the story, they were unevenly divided between two camps: Most were in the first group, theorizing that there had to be a logical explanation for the trades, while in the second – the minority – reporters theorize there must be a more-sinister motivation.

As it turns out, my initial impression was much closer to the truth than even I realized. As a result, I’m relaxed and in an even-less conspiratorial mood now.

Let me explain ;

What nobody could figure out about this trade was the “why” and, in fact, they still can’t nail it down with any degree of certainty because there are just too many possibilities.

One scenario, however, is standing out as being more reasonable and more likely than all the others. And we have a bit of insight to base some of our more-rational theorizing on, and that’s only because someone finally talked. That “someone” was Dan Perper, a partner at options-market-maker Peak6.

Perper was widely quoted recently as saying that the trades are part of a “box-spread trade.” I wasn’t personally able to reach him over the past week, so I cannot confirm this firsthand. But he’s widely respected – as is Peak6 – and the comments were broadly disseminated, so I have no reason to doubt what’s been reported.

As for the “box-spread trade,” and what it is supposed to accomplish, let me just say that it is a highly specialized transaction that professional traders or sophisticated institutional investors use on occasion to “box” in the market and guarantee profits, risk or, as may be the case with this trade, financing.

Without boring you with the details, here’s what you need to know about how this type of trade works. Basically, the counterparties, in this case a buyer and a seller, agree to a trade at a price that essentially splits the difference between current interest rates or prices. The price the trade takes place at is really is a moot point.

What’s important to understand is that the seller benefits because they essentially get to borrow the money from the buyer at a slight discount to prevailing market rates, while the buyer is able to keep his money moving in what is essentially a cut-rate loan at a time when he probably can’t lend it to others at all and risks it standing still – the kiss of death for a financial firm that depends on its liquidity for daily operations.

So what does this tell us in light of the fact that somebody placed bets now covering over 132,000 September options, up from the initial 100,000 on August 16th?

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In a nutshell, if this monster trade actually is a box trade, it suggests to me that an unknown major player is hurting for cash and couldn’t obtain it any other way.

It also suggests, as I have said for the past few weeks, that the subprime slime is not yet out of the global financial system.

The only question that truly remains in my mind – again, assuming that this is a box trade – is who’s hurting so much that they needed more than $900 million badly enough and immediately enough to utilize such a trade structure. And, in a related question – so there are two actually – is who couldn’t get traditional financing even with the Fed offering liquidity as a last resort?

I bet we’ll find out in the next few weeks when the several of the bigger financial houses report earnings and a number of hedge funds make decisions on redemption requests.

Oh, and by the way, even if this trade does wind up being a box, I still find it too coincidental that it is slated to wind up this month near the anniversary of 9/11.

I guess there is a little conspiracy theorist in me after all;

[P.S. As I mentioned earlier, Money Morning scooped every mainstream news source on this “Mystery Trade” story. When you look at the related links, you’ll see that our original report appeared first thing in the morning on Wed., Aug. 29. But as you’ll see from everything we’ve posted here, the other news organizations didn’t start running their stories until Wed., Aug. 30. I mention that only to underscore that, as a Money Morning subscriber, you can be assured of getting news and investment ideas before everyone else.

One of the ways we do that is by tracking money flows, hence the name of our monthly sister publication, The Money Map Report. And I’m sure it’s no surprise to you that much of those money flows are flowing into – or out of – China.

If you’re just starting to add international investments to your holdings, or want to invest some money in China, look to a good China mutual fund or Exchange Traded Fund (ETF). That will provide you the long-term benefits of China’s continued explosive growth, while also giving you the diversification needed to rise out that economy’s inevitable swings. One top-performing mutual fund is the China Region Opportunity Fund (USCOX), which is managed by U.S. Global Investors Inc. (Nasdaq: GROW) – a great example, by the way, of a company that will be profiting indirectly from China.

I mention the China Region Opportunity Fund and U.S. Global Investors because the fund-management firm is well run, and its funds are well managed. The company is a favorite of several of our analysts here at Money Morning.

But if you’ve already got a start on your Asia and China investments, and are looking for something more sophisticated, you’ll want to read our new investment-research report. Our team has several profit opportunities that are related to the growth in China, as well as the rest of Asia. These profit opportunities are poised to benefit from the growing global commodities boom, and to the capital that’s needed to finance the industrial development taking place on that side of the world.

In fact, our worldwide research team has identified $867 billion worth of industrial investments that will be flowing through the global financial markets, and that are aimed at development initiatives in such key sectors as agriculture and biotechnology, telecommunications, energy and finance. Our analysts have labeled this confluence of capital as “The Big Money Bang.”

That $867 billion is about to rock the markets, fueling bigger profits than gold, telecom, and the Internet combined. Investors who tap in now are about to pocket $1.54 million in the next 18 months.

The “Big Money Bang” will create countless investment opportunities. But we’ve singled out the best four, many of them keyed to some of the trends discussed below. They include:

• A financial institution so tied into Asia’s booming development that we’ve nicknamed it “The One Stock You Can Retire On.”
• A commodities-related company with ties to both agriculture and biotechnology whose product is provided by so few firms that it’s actually “more precious than oil.”
• A power-provider involved in a $40 billion energy venture that’s central to China’s continued ability to grow.
• And a telecommunications company whose technology has the potential to revolutionize both Internet Video and Internet Telephony (VoIP) telephony. Unlike other tech wannabes, however, this company also has the managerial talent to pull it off.

To get the details on the companies we’ve mentioned in this free report, click here.
You’ll be glad that you did.

Related News and Story Links:

• Money Morning News Analysis:
  This $900 Million Bet Has Global Traders Talking.
• The Street.com TV Interview Video Clip:
  ‘Bin Laden’ Trades Stir Terrorism Fears.
• TheStreet.com:
  Dispelling the ‘Bin Laden’ Options Trades.
• TheStreet.com, et al:
  Bin Laden Options Trades Have Wall Street Whispering.

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In a move that underscores the profit potential of global infrastructure projects, mutual-fund manager U.S. Global Investors Inc. (GROW) has installed a new global strategist who will focus exclusively on these opportunities.

U.S. Global Investors – a stock that’s favored by several of Money Morning’s analysts – said this week that it has hired Jack Dzierwa, a citizen of Poland, Canada and the United Kingdom who has substantial experience in the international investing arena.

“The infrastructure theme will remain on the radar screens of investors worldwide for many years to come,” Dzierwa said. “Recent events highlight the need for directing more attention to infrastructure, and this is already reflected in the order books for many companies. We will work to identify the main beneficiaries of this global trend, which is being supported by both the public and private sectors.”

As countries such as China and India and others work to make the jump from “developing” to “developed” economies, infrastructure will be a key focus. By infrastructure, analysts are generally referring to highways, airports, water and wastewater systems, power-generation facilities such as hydroelectric dams, and even specialized projects such as industrial parks or business-incubator facilities.

These countries will have to install modern water and sewerage systems to modernize their cities as both places to live and as locales in which foreign companies – such as those from the United States, Japan or Europe – will want to set up shop. Rivers will have to be dammed up to divert water for drinking and irrigation, and also to generate power through the construction of hydroelectric power plants like China’s Three Gorges Dam, a project so massive that it’s taken more than a decade just to build. Located on the Yangtze River in the Hubei Province, the $23 billion dam is currently the largest hydroelectric river dam in the world – more than five times the size of the huge Hoover Dam in the United States. It’s about 7,700 feet long and 620 feet high (for purposes of comparison, the Golden Gate Bridge Towers are about 760 feet tall, meaning this Dam is a bit more than eight-tenths the height of San Francisco’s Golden Gate. That’s tall).

China just reported that investments in fixed assets – factories, property, plants and equipment – soared 26.6% to $747 billion in the first seven months of this year, as the country tries to build needed facilities and capitalize on most opportunities as its economy continues to rocket along. Not all of this investment is related to infrastructure, but a lot of it is.

For investors, this kind of basic development creates all sorts of investment opportunities, many of them less-volatile and with a longer run of so-called earnings “visibility” than, say, a tech company whose core strength could be leapfrogged and made obsolete overnight by a garage startup.

Investors can invest directly in the foreign domestic participants – investing in, say, a Chinese power company or a Korean steelmaker that might benefit from the infrastructure development – or indirectly via a U.S.-based company such as equipment makers like a Caterpillar Inc. (CAT) or Deere & Co. (DE) whose products will be needed on these big development projects.

In fact, when the Moline, Ill.-based Deere recently reported that its second-quarter profits had jumped 23%, the company said a 5% decline in U.S. sales was more than offset by a 30% increase in sales overseas.

The San Antonio-based U.S. Global Investors (www.usfunds.com) is boutique investment-management firm that focuses on profitable niches around the world. With an average of $4.83 billion in assets under management during the quarter that ended March 31, U.S. Global manages domestic and offshore funds that offer investors investment options ranging from natural resources, emerging markets funds, and even money-market funds. It also has one of the highest-rated China mutual funds in the industry, the China Region Opportunities Fund (USCOX).

Indeed, four of the company’s mutual funds were listed among the top-performing funds in the industry, according to a recent report published by The Wall Street Journal. Most notably, U.S. Global’s China Region Opportunity Fund (USCOX) ranked #35 in total return among all U.S. mutual funds for the three-month period ending June 30, according to The Journal’s quarterly fund report.

GROW’s Eastern European Fund (EUROX) – another Money Map Report recommendation – ranked fifth out of all funds in terms of total return for the five years that ended June 30.

Two of U.S. Global’s natural resources funds both fared extremely well in The Journal’s survey. GROW’s Global Resources Fund (PSPFX) ranked #13 and the World Precious Minerals Fund (UNWPX) ranked #54 over the same period.

In summary:

• Eastern European Fund: 5th-best over the past five years.
• Global Resources: 13th-best over the past five years.
• World Precious Minerals: 54th-best over the past five years.
• China Region Opportunity: 35th-best over the past three months.

Dzierw, a former director in the emerging markets research department at ING Financial Markets in London, will focus now on infrastructure investment opportunities.

Dzierw’s “unique explicit and tacit knowledge combined with our investment process will enhance our capacity to grow with the massive and sustainable global infrastructure boom,” says Frank Holmes, U.S. Global Investors’ chief executive officer and the chief investment officer.

Related News and Story Links:

• Wikipedia:
  Three Gorges Dam.
• Money Morning News Report:
  Fixed Asset Investment In China Rises to $747 Billion, a 26.6% Increase.
• Money Morning News Report:
  China Communication Construction Taunts Barred U.S. Investors With 136% First-Half Profits, 130% YTD Stock Gains.
• Money Morning Investment Analysis:
  The Second Quarter Votes are in: Global Gains Trump Domestic Pains.

Over the past several years, international ETFs have been one of the main stars in the investment arena. Indeed, these international funds have eclipsed virtually every domestic benchmark, according several publications that follow the sector.

As one great example, consider the iShares MSCI Emerging Market Index (Amex: EEM), considered a bellwether of international ETFs. Since its debut in April 2003, EEM is up 224% ¬ or nearly four times the 63% gain notched by the U.S.-focused Standard & Poor’s 500 index.

Market Beating Returns With ETFs

Most ETFs haven’t been around all that long. But the best ones have already forged an enviable record and help show why it’s important for investors to look abroad for profit opportunities.

Indeed, all three if these closely watched domestic U.S. stock indexes have been thoroughly trounced by the top three international ETFs. We already mentioned that the S&P 500 is up about 63% since April 2003. During that same period, the tech-heavy Nasdaq has climbed 79% while the blue-chip dominated Dow Jones Industrial Average has advanced 51%.

The other top ETFs have left these results in the dust.

• The well-diversified iShares EAFE Index (Amex: EFA) – the highest-volume international ETF after iShares Japan – has more than doubled, notching a return of 144%. EFA is an index fund that invests in Europe, Asia, Australia and Africa.

• As for the afore-mentioned iShares Japan (Amex: EWJ): Well, it’s up 138% during that same stretch.

While it’s usually prudent to avoid the most-recent hot performers – and while analysts claim many of the international ETFs are currently overbought – the ultra-strong long-term growth forecasts for international investments makes it prudent to keep these in mind.

As always, to really understand the issue, we must take a closer look at some investment money flow statistics.

The Money Flows ‘Tale of the Tape’

Of the $124 billion that investors poured into mutual funds last year, $110 billion went into international investments. That’s almost 90%.

ETFs have been the big beneficiary. While mutual funds of all types have seen their assets climb by a total of 50% over the past five years, ETFs holdings have soared fivefold during the same period, according to a recent report by The Wall Street Journal.

Expect the surging interest in overseas investing to continue: From a base of $118 trillion at the end of 2003, the worldwide value of financial assets will soar to nearly $230 trillion by the end of this decade, McKinsey Global Institute predicted in a recent report.

Fast-growing markets in Asia – and to a lesser extent Europe – will be leading the charge, says McKinsey, the think-tank affiliate of the esteemed consulting firm.

Indeed, between 1993 and 2005, financial assets in these markets grew at a compounded annual rate of 16.4 percent – besting the European Union (9.1%), the United States and the United Kingdom (both 8.5%), and Japan (4.7%).

These newly capitalist economies now account for about $15 trillion of the world’s total financial assets. That’s only 11% of the total, but is more than double the $7 trillion of a decade ago, McKinsey said.

And yet these trillions in additional homegrown financial assets have yet to really fuel stock-market growth in these new markets. Just look at China, which just over a year ago had $5 trillion in financial assets. The kicker: Nearly three quarters of that money was still being held as bank deposits.

As investors in countries such as China see their incomes advance, they’ll have greater and greater confidence in their financial system – and will have a growing desire to benefit, as well. Cash will leave bank accounts and find its way into stocks, bonds and mutual funds, fueling big advances in the key market indices that many of these ETFs mimic.

That’s especially huge in China: In 2003, more than 60% of its $5.1 trillion in financial assets were bank deposits, McKinsey found. When that cash is withdrawn from banks and directed into stocks, it’s precisely the kind of money flow that could spark a major advance in China stock prices.

In the United States, by contrast, only about 20% of financial assets are held as bank deposits, the McKinsey report shows.

ETFs Trump Mutual Funds

As they proliferate and are refined, ETFs are emerging as the best way to profit from global growth, several recently released reports conclude. Because they track an index, but can be traded like a stock, ETFs offer the diversification of conventional mutual funds – but with a liquidity that can make them much safer during volatiles periods.

And since they “bundle” together the securities that make up an index, the transaction and operating costs of ETFs are a fraction of a mutual fund that pursues an active management strategy.

With some of these markets, ETFs represent the only way possible for U.S. investors to benefit from the high rates of growth: The companies aren’t registered with U.S. securities regulators, meaning American investors can’t purchase the individual stocks, and no good U.S.-based mutual fund exists.