Most ETFs passively track indexes, and those indexes generally have a strategy as to how its components are weighted. “Weighting” refers to the way stocks are distributed within a portfolio, Ron Rowland for Money and Market explains. For example, in one index, a company might make up 10% of the overall portfolio while in another index that’s constructed differently, the same company could make up just 1% of the portfolio.

Providers of ETFs have developed alternative weighting schemes that can be useful, especially if there is reason to believe that certain companies are going to outperform others. Here is a rundown:

Equal weight: This is a simple approach – divide the money between all the stocks weighted within the index equally. If an index has 50 stocks, each one represents 2%.

• SPDR S&P Biotech (NYSEArca: XBI)
• SPDR S&P Semiconductor (NYSEArca: XSD)

Dividend & Earnings Weighted: WisdomTree is the master of this method. These are for income-loving investors who want to own companies that have a record of growing their dividends. The indexes are measured, or weighted, by  fundamental factors such as dividends and earnings. The provider says that this method can lead to better long-term results.

• WisdomTree India Earnings (NYSEArca: EPI)
• WisdomTree Dividend minus Financials (NYSEArca: DTN)

Revenue Weighted: Simply put, stocks within the index are weighted according to revenue. Over time, the results should yield good returns.

• RevenueShares Small Caps (NYSEArca: RWJ)

Fundamentally Weighted: A number of factors go into fundamental weighting, including book values, sales, dividends and cash flow.

• PowerShares FTSE RAFI US 1000 (NYSEArca: PRF)
• PowerShares FTSE RAFI Emerging Markets (NYSEArca: PXH)
  

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Investors are always on the lookout for that new money-making deal that would help fill their lonely pockets with a fistful of cash, but those who choose incorrectly may have even lost the pants that those pockets were in.

According to John Spence for The Wall Street Journal, 2008 was not a kind year for traders investing in:

• SPDR S&P 500 (SPY): dropped 37%
• iShares MSCI EAFE Index Fund (EFA): dropped 41%
• PowerShares FTSE RAFI Emerging Markets Portfolio (PXH): dropped 45%
• ProShares Ultra Financials (UYG): dropped 85%
• iShares Dow Jones U.S. Home Construction (ITB): dropped 43%
• Commodities and material ETFs also took a beating. Most notably, oil ETFs and exchange traded notes (ETNs) that saw that drop of oil to below $40 a barrel. United States Oil Fund (USO) dropped 56%.

The important thing for investors to keep in mind is that some of the most beaten-down sectors will have the best opportunities for a recovery later. Some real bargains are lurking around the markets right now, so eye these funds and see if they move above their trend lines before you consider whether they’re right for you and your goals.

On the flip side, there are those lucky few who did not choose lemons in 2008 and profited with ETFs and ETNs such as:

• ProShares UltraShort S&P 500 (SDS), a leveraged, bearish fund designed to short the market, gained 61%.
• Long-term Treasury bonds sensitive to rate changes benefited from near zero Fed rate cuts. Vanguard Extended Duration Treasury ETF (EDV) gained 55%. iShares Lehman 20+ Year Treasury Bond Fund (TLT) gained 34%. SPDR Lehman Long Term Treasury ETF (TLO) gained 24%
• Currency ETFs that tracked the weakness of the dollar to other currencies also benefited. iPath JPY/USD Exchange Rate ETN (JYN) gained 23%. Rydex CurrencyShares Japanese Yen Trust (FXY) also gained 23%.

Overall, markets greatly shrunk in volume, but investors still continued to invest in ETFs. Market turmoil is also said to raise questions regarding ETNs and their innate credit risks for investors.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

A case in point is the WisdomTree Emerging Markets High-Yielding Equity (DEM), which has so far managed to resist the downturn in energy and commodities by a big margin in the emerging market ETF space. Jeremy Schwartz, deputy director of research at WisdomTree, noted that because the fund did its annual rebalancing in June, the fund has been able to significantly outperform other similar funds in the emerging markets category.

When the rebalancing took place, the weights in energy and materials were reduced, because of the fund’s strategy of selling off stocks that had risen above their fundamentals or become “expensive,” while buying more of the cheap stocks.

In July, the commodities started their downturn.

“It was a little bit of fortuitous timing that oil went down,” he admits. But he points out that the recent events are a prime example of how the fund’s quant rules-based system really works. “You don’t have to decide. It’s a mechanical rules-based formula, based on total dividends paid.”

The fund takes those stocks with the top dividend yields, then winnows that list down to what is currently 310 holdings.

WisdomTree uses dividends to weight stocks because, among other things, cash dividends can be a measure of a company’s value and profitability.

So far, the strategy appears to work: the fund is down 2.6% year-to-date. It was outperforming other emerging markets ETFs before the rebalancing, but the latest moves only enhanced its performance:

• PowerShares FTSE-RAFI Emerging Markets ETF (PXH), down 14.2% year-to-date
• WisdomTree Emerging Markets Small Cap Dividend (DGS), down 15.7% year-to-date
• Vanguard Emerging Market (VWO), down 18.4% year-to-date
• iShares MSCI Emerging Markets (EEM), down 17.8% year-to-date

PowerShares also uses four factors to weight its stocks: dividends, cash-flow, book value and sales, and it to is outperforming the more traditional weighting methods used by VWO and EEM.

Between the fundamentally weighted ETFs, there’s no huge cost advantage, says Confused Capitalist for iStock Analyst. DEM and DGS are cheaper at 0.63%, while PXH is 0.85%.

If you can stomach the risk that often comes with these areas of the world, investors might be able to capture some of the potential that developing countries offer, Matt Krantz for USA Today reports.

Emerging markets are among the riskier asset classes, but that does not mean you should avoid them. It is crucial to understand this asset class and incorporate it into a portfolio in a way that the overall risk is tolerable. Among the issues you may find are political risk, immature capital markets and systems of accounting, and the risk that an emerging economy’s growth might hit a bump in the road.

Take a look at this year: shares of Chinese stocks have fallen around 30%, much steeper than the S&P 500’s 17% dip. Look at these emerging markets ETFs and decide how they fit into your overall portfolio and risk profile:

• iShares FTSE/Xinhua China 25 Index (FXI), down 20.3% year-to-date
• Vanguard Emerging Markets (VWO), down 12.8% year-to-date
• iShares MSCI Emerging Markets Fund (EEM), down 11.8% year-to-date
• PowerShares FTSE/RAFI Emerging Market Portfolio (PXH), down 11.5% year-to-date