We don't see any end in sight for increased defense spending, so we believe PowerShares Aerospace & Defense Portfolio (PPA) is a strong play. The A-rated exchange-traded fund returned 20% in 2006. It is 50% invested in aerospace/defense, 13% in media, 11% manufacturing, 8% electronics, 5% computers and 4% metal fabricate/hardware. The largest holdings are Boeing (BA ), United Tech (UTX), Lockheed Martin (LMT) and Honeywell (HON).

Calling on the telephone will never go out of style, at least not within the next 12 months. Because of this, we chose Vanguard Telecommunications Services (VOX). This A-plus rated ETF returned 36.7% in 2006, with 100% invested in U.S. stocks. The holdings were divided by 97% telecommunications, 2% Internet and under a percent of software. Top holdings include AT&T (T), Verizon (VZ), Sprint Nextel (S) and Alltel (AT).

Because communications growth has been much stronger outside the U.S. for the past several years, we're taking a close look at GAMCO Global Telecom (GTCAX). This A-plus rated fund is well diversified globally: 38% U.S. holdings, 30.5% European, 6.5% Asian Pacific (excluding Japan), 8.6% Latin America, 12.1% Canadian and 4.2% Japanese. Telecom worldwide offers great growth opportunities, especially in wireless communications, where the fund has 25.3% of its holdings. The fund also has cable, satellite and entertainment stocks.

Because locating people and objects via global positioning systems is becoming more popular, we selected A-rated Trimble Navigation (TRMB). The company is a GPS service provider, primarily to commercial and government customers. It is also a market leader in construction, surveying, agricultural guidance and asset and fleet management. To further expand its suite of services and capabilities, Trimble recently agreed to acquire @Road (ARDI) for $496 million, or $7.50 a share, in a cash and stock deal. The company expects the acquisition to add to its earnings by fiscal year 2008. We also like its strong worldwide presence -- nearly half of its revenue comes from outside North America -- and its strong revenue and operating income growth, which have been trending upward for years.

To much fanfare, software giant Microsoft (MSFT) will be launching Vista, yet another operating system that will spur worldwide demand for related software. That's one of the reasons we chose Adobe Systems (ADBE). The company has a C rating, but this is attributed to a difficult integration of its Macromedia acquisition, which has affected the company's financial performance. However, we believe that earnings will improve this year and that the company will benefit from the Vista launch as well as the continued proliferation of mobile graphic applications. Its popular Creative Suite application software, used by professionals for Web design and publishing, will release version 3 in the coming months. It's the first update to this major product in more than two years and the first time that Creative Suite will work seamlessly with Intel-based Apple (AAPL).

According to the Department of Health and Human Services, the number of Americans over 65 years old will more than double by 2030 from 2000. Because the U.S. population is aging and this is the first year for the expanded third-party insurance coverage on drugs and supplies, we like the B-minus-rated Schwab Health Care Focus Fund (SWHFX). This open-end fund, like the entire tech sector of the market, has fallen behind the rest of the market in recent months. But it is one of the small handful to maintain a buy rating (B-minus or above), down from an A as recently as September 2006. It is 55.6% invested in pharmaceuticals and biotech and 42.6% in health care equipment. Exposure to biotech, pharmaceuticals and health care provides good diversification to the other 2007 selections.

And last but not least, a diversifying industrial idea: Because total return investing is best done with quality dividend-paying stocks, we like the outlook for Caterpillar (CAT - news - Cramer's Take), the world's largest manufacturer of construction and mining equipment. The stock is attractive at $60 per share, has an 11.5 PE ratio and an above average relative dividend yield ratio. This is a classic value play where one can earn interest while waiting for higher earnings to emerge from this company's mining, energy and infrastructure growth, primarily in non-U.S. markets.