Exchange-traded fund Investment Strategies

Many current U.S. ETFs are based on some index; for example, SPDRs (Standard & Poor's Depository Receipts, or "Spiders") (AMEX: SPY) are based on the S&P 500 index. The index is generally determined by an independent company; for example, Spiders are run by State Street, while the S&P 500 is calculated by Standard & Poor's. Sometimes, a proprietary index is used. Invesco adopts a fundamental-based approach. Rather than follow a published index, which tends to be weighed according to the size of its constituents - the weight given to each of the companies is based on the relative attractiveness in investment terms.

The SEC describes an ETF as "a type of investment company whose investment objective is to achieve the same return given a particular index". The development of ETFs has progressed more quickly since then, with a variety of objectives pursued.

A series of ETFs introduced by ProShares in 2006 - 2007 no longer follow the text-book definition. These funds, while correlating to the performance of the S&P 500, NASDAQ 100, DJIA, and S&P 400 Midcap, do not attempt to merely achieve the same return as the underlying index. These forty funds attempt to either achieve the daily performance of the designated benchmark times two, times negative one, or times negative two. They are ETFs with integrated leverage.

Another example of an innovative ETF that has broken the classic mold is the oil futures ETF: USO. This ETF tracks the performance of the West Texas Intermediate (WTI) light, sweet crude. This is not a benchmark, but a traded commodity.

Rydex has taken a different direction and worked with S&P to create new, equal-weight benchmarks for their proprietary benchmarks. These "benchmarks" are rebalanced quarterly.

http://en.wikipedia.org/wiki/Exchange_traded_fund