As you might have guessed, in the US smaller was better as Royce Micro-Cap (RYOTX) was up 9.4%, Westcore Micro Cap Opportunity (WTMIX) rose 8.0%, FBR Small Cap Investor (FBRYX) gained 7.5%, Brown Capital Mid Cap (BCMSX) earned 6.9%, Wells Fargo Advantage Growth (SGROX) returned 6.8%, and Neuberger Berman Real Estate (NBRFX) picked up 6.1%. In the hedged mutual fund department, Wasatch Long/Short Equity (FMLSX) gained 4.8% and Invesco Balanced-Risk (ABRYX) picked up 3.6%.

It was a good month for all financial markets as Bond Funds also posted nice gains. Fidelity High Income  (SPHIX) was our leading Bond Fund with a gain of 3.4%. Also performing well were Loomis Sayles Global Bond (LSGLX) which earned 2.8%, Payden Emerging Markets Bond (PYEMX), PIMCO Real Return D (PRRDX), and PIMCO Total Return  (PTTDX) which all picked up 2.6%.

Precious Metals were the biggest ETF winners in January as iShares Silver Trust (SLV) jumped 19.8% to lead the pack. Next in line were several sector ETFs which were led by SPDR S&P Biotech (XBI) with a gain of 15.4%, followed by SPDR Dow Jones International Real Estate (RWX) and SPDR S&P Homebuilders (XHB) both up 9.2%.

Some of the strongest returns came from overseas as iShares MSCI Brazil Index (EWZ) climbed 14.3%, SPDR S&P Emerging Markets Small Cap (EWX) picked up 14.0%, and iShares MSCI Germany Index (EWG) which recovered nicely from the European Debt Crisis to post a gain of 11.0%

iShares Russell Microcap Index (IWC) was our top domestic equity ETF with an 8.7% gain, PowerShares Nasdaq 100 (QQQ) was next with a rise of 8.4% followed by iShares S&P SmallCap 600 Value Index (IJS) which was up 7.9%, and iShares Russell Midcap Growth Index (IWP) which earned 7.2%.

The top bond ETFs in January were SPDR DB International Inflation Protected Bond (WIP) which returned 4.6%, SPDR Barclays Capital International Corp Bond (IBND) which earned 3.5%, and SPDR Barclays Capital High Yield Bond (JNK) which was up 2.6%.

Our February 2012 Mutual Fund Portfolios, ETF Investment Portfolios, and Best Fidelity Funds have been updated through January 2012. The Mutual Funds in our Mutual Fund Portfolios are chosen from our Best Mutual Funds. The ETF’s in our ETF Investment Portfolios are chosen from our List of 100 Best Exchange Traded Funds. The investment performance history of our mutual fund portfolios and ETF investment portfolios are tracked on our investment portfolio performance page.

On the other end of the spectrum, Long Term Government Treasury Bonds had the only red number on our sheet of benchmark returns. While a drop of 0.1% is not much of a fall, it still put an end to a nice run of positive months. For the moment, at least, the flight to quality and rise in volatility caused by the European debt crisis has taken a back seat to some decent economic news in the good ole USA. A good month for stocks is usually a good month for High Yield Bonds, and January was no exception, as they picked up 3.0%. Good news on the economy also signals that inflation could pick up some time soon, a fact that helped push TIPS up 2.4% for the month.

We have no additions to our Mutual Fund list or our ETF Watch List for this quarter, but we have added Forward Commodity L/S Strategy (FCOMX) and Grant Park Managed Futures Strategy (GPFNX) to our model portfolios.

Asset Allocation January 2012

Our best funds in 2011 were invested in TIPS as Fidelity Inflation-Protected Bond (FINPX) and American Century Infl-Adj Bond (ACITX) both gained 13.0% in 2011. Not too far behind was Invesco Balanced-Risk Allocation (ABRYX) which earned 10.5% thanks to a significant allocation to Bonds. It proved to be a good year for Fidelity Bond Funds as Fidelity New Markets Income (FNMIX) gained 7.9% this year and Fidelity Total Bond (FTBFX) returned 7.4% in 2011.

While it was a tough year for International Mutual Funds, at least our choices were ahead of more than half of their competition. Our best performers in 2011 were Westcore International Small Cap    (WTIFX) which lost (5.7%), Fidelity International Growth (FIGFX) which fell (8.9%) and Matthews Asia Dividend (MAPIX) which fell (10.0%).

Amazingly, our best performning ETFs in the fourth quarter of 2011 did not gain enough to finish the year in the black. SPDR Homebuilders (XHB) returned 29.0% for the quarter, but actually lost (0.1%) for the year and iShares S&P SmallCap 600 Value (IJS) picked up 18.4% last quarter but still lost (1.7%) for the year. Our best performing Bond ETF for the quarter was iShares iBoxx High Yield Corporate Bond (HYG) gained 10.0% last quarter, but iShares Barclays 20+ Year Treas Bond (TLT) on the other hand was the bigger winner with a return of 33.6% in 2011.

Our best stock ETFs for the year were SPDR Dow Jones Industrial Average (DIA) which gained 7.7% and SPDR S&P Dividend (SDY) which added 7.1%. Internationally, a couple of ETFs almost showed a profit as PowerShares International Dividend Achievers (PID) lost only (2.4%) and iShares MSCI Malaysia Index (EWM) fell only (2.7%). There was an amazing range of returns across sector ETFs in 2011. While Utilities Sector SPDR (XLU) gained 19.5% and Consumer Staples Sector SPDR (XLP) returned 14.1%, Financial Sector SPDR (XLF) lost (17.1%) and Materials Sector SPDR (XLB) lost (10.7%).

Our January 2012 Mutual Fund Portfolios, ETF Investment Portfolios, and Best Fidelity Funds have been updated through December 2011. The Mutual Funds in our Mutual Fund Portfolios are chosen from our Best Mutual Funds. The ETF’s in our ETF Investment Portfolios are chosen from our List of 100 Best Exchange Traded Funds. The investment performance history of our mutual fund portfolios and ETF investment portfolios are tracked on our investment portfolio performance page.

The best place to be invested in 2011 was actually Long Term Treasury Bonds which gained a whopping 30% in 2011. These government securities were buoyed far more by the flight to quality by investors than governmental efforts to keep interest rates low across the globe. TIPS gained 13.6% for the year, even with rather low inflation during the year. This was certainly due to an expectation of significant inflation once that once the economies of the world start to pick up steam. Interestingly, REITS actually had a nice year, as these securities gained 8.5% in anticipation of a recovery in the housing market. From a style perspective, Large Cap Growth fared the best this year, while Small Cap Value was on the wrong end of the investment performance curve.

On the other side of the spectrum, it was a difficult time to be invested overseas, thanks to a continuing stream of disturbing headlines from Europe. Not only did this take down international financial markets, the impact was even worse for US investors thanks to the rise in the Dollar sparked by a flight to quality. Developed countries were down 12.1% in 2011, while Emerging Market Equities took an even bigger hit by falling 18.4% in 2011.

Investment Returns December 2011

For the most part, Bonds hand a more difficult time than stocks, although Fidelity Inflation-Protected Bond (FINPX) did manage to pick up 0.6% in November. High Yield Bonds took the biggest hit with Artio Global High Income (BJBHX) falling 2.8%. International Bonds were not far behind as Dreyfus International Bond (DIBRX) dropped 2.6%.

As usual, there was a little more action in ETFs, in particular those with a sector orientation. Interestingly SPDR S&P Homebuilders (XHB) was up 5.8%, while PowerShares DB Energy (DBE) gained 3.4% and Consumer Staples Sector SPDR (XLP) added 3.1%. While iShares S&P SmallCap 600 Value Index (IJS) was our big US Stock ETF gainer in Noverber by rising 1.5%, SPDR S&P Dividend (SDY) was not far behind with a gain of 1.3%. This ETF has been one of the better performers for the year, up 6% in 2011 thanks to it significant dividend. Technology stocks took the biggest hit for the month as PowerShares Nasdaq 100 (QQQ) fell 2.7% in November.

Internationally, Market Vectors Russia ETF (RSX) added 2.5%, while iShares MSCI South Africa Index (EZA) rose 2.2% in November. On the other hand, it was an even more difficult market for stocks in South American than Europe as iShares MSCI Chile Index (ECH) fell 6.4% and iShares MSCI Brazil Index (EWZ) dropped 5.4%.

Like Mutual Funds, Government Bond ETFs faired better than International Bonds and High Yield, led by a gain of 2.0% by iShares Barclays 20+ Year Treas Bond (TLT). SPDR Barclays Capital International Corporate Bond (IBND) fell 6.2%, while SPDR Barclays Capital High Yield Bond (JNK) dropped 2.8% in November.

Our December 2011 Mutual Fund Portfolios, ETF Investment Portfolios, and Best Fidelity Funds have been updated through November 2011. The Mutual Funds in our Mutual Fund Portfolios are chosen from our Best Mutual Funds. The ETF’s in our ETF Investment Portfolios are chosen from our List of 100 Best Exchange Traded Funds. The investment performance history of our mutual fund portfolios and ETF investment portfolios are tracked on our investment portfolio performance page.