[Editor's Note: This is a longer version of the article which appeared in the print edition of Investment Advisor, Februrary 2010 and includes S&P rankings of the ETFs discussed and some of the stocks they own.]

In January 1993, traders at the struggling American Stock Exchange arrived at work to find a menacing, nine-foot inflatable spider handing from the ceiling. Set up to mark the first day of trading in State Street’s Standard & Poor’s Depositary Receipts (SPDRs), a new type of security tracking the S&P 500 that had characteristics of both mutual funds and exchange-listed stocks, the spider was an ominous sight: four years earlier, the Amex had tried to launch a similar product called Index Participation Shares that drew little interest from Wall Street, and left the exchange playing catch-up to its rivals, the much larger New York Stock Exchange and the rapidly growing Nasdaq.

This time, however, the timing was right, and the new listing was an instant success, breathing new life into the Amex for years to come. Later renamed the SPDR S&P 500 Fund (SPY, $113, Overweight–see The Rankings Explained sidebar), this exchange traded fund now has more $85 billion in assets, making it by far the largest ETF in the world. As might be expected, a number of competitors to the SPDR have sprung up hoping to cash in on that success. While some, such as the iShares S&P 500 Index Fund (IVV $113 Overweight), are virtually identical to the SPDR fund, a handful of other ETFs offers more substantial modifications to the original formula. Some tinker with the weightings of the index itself, while others add an options-based strategy to the index holdings, short sales, and elements of active management to enhance performance.

How They Are Similar; How They Differ

Like the S&P 500 index itself, the SPDR and iShares funds use market capitalization to determine the relative weights of each individual stock in the index. Currently, ExxonMobil (XOM, $69, *****) is the largest company in the index, representing about 3.4% of the index’s total capitalization. Information technology is the largest sector, accounting for almost 20% of the total.

Rydex markets the S&P Equal Weight ETF (RSP, $40, Marketweight), which, as its name suggests, gives each S&P 500 Index member an equal, 0.2% weighting, thereby “eliminating the bias towards large companies,” in Rydex’s own words. (The ten largest components of the S&P 500 have a combined 20% weighting in the market cap weighted index but just 2% of an equal weight index.) Equal weighting the components changes the fund’s sector exposure, raising consumer discretionary to almost 16% compared with about 9% for a market-cap weighted fund, and lowering information technology to about 15%. The Rydex ETF has $1.8 billion in assets though it has a much higher expense ratio–0.4%–than the SPDR or iShares funds, which charge 0.0945% and 0.09%, respectively.

RevenueShares employs a slightly different approach, with its Large Cap ETF (RWL, $21, Marketweight) weighting the same S&P 500 index components by annual trailing revenue instead of market capitalization. In its version, Wal-Mart (WMT, $54, *****) is the largest component of the fund, at 4.73% of the total, though it doesn’t even crack the top 10 in the market capitalization-weighted index. This ETF’s top 10 excludes Microsoft (MSFT, $31, ***), currently the second largest component by market cap, as well as No. 3 Apple Computer (AAPL, $214, ****), No. 4 Johnson & Johnson (JNJ, $65, ****), and No. 5 Procter & Gamble (PG, $61, ****). It has about $100 million in assets and charges a 0.49% expense ratio.

As Measured by Earnings

The WisdomTree Earnings 500 Fund (EPS, $39, Overweight) takes a more involved approach. Using the S&P 500 market-cap weighted index as its starting point, it then re-weights each company each December according to the share of earnings each component contributed to the total of all index components. Its top 10 holdings include Wal-Mart and Pfizer (PFE, $19, ****), and exclude Apple and JPMorgan Chase (JPM, $42, *****. It has a lower, 0.28% expense ratio.

Another fund seeking to increase the importance of earnings in the S&P 500 is the First Trust Large Cap Core AlphaDEX Fund (FEX, $23, Underweight), an “enhanced” index that uses a stock selection methodology that ranks the S&P 500 stocks according to their combined score on a number of criteria: price appreciation, sales-to-price, and one year sales growth for growth stocks, and book value-to-price, cash flow-to-price, and return on assets for value stocks. It then eliminates the bottom 25% and divides the remaining list into quintiles. The top quintiles have a larger weight within the index, with each stock weighted equally within each quintile. The fund, which has $36 million in assets and charges a 0.7% expense ratio, is rebalanced quarterly.

The Options Options

Two funds, the PowerShares S&P 500 BuyWrite Portfolio (PBP, $22, Marketweight) and the ProShares Credit Suisse 130/30 (CSM, $51, Underweight) make extensive use of options to enhance their performance. The BuyWrite fund invests 80% of its $143 million in assets in S&P 500 stocks, and uses the rest to sell call options at strike prices above the market. This strategy provides additional income from the premiums if the index fails to reach the higher strike price, but it limits gains from stronger moves up. The fund charges 0.75% in expenses.

The Credit Suisse 130/30 fund seeks to outperform the S&P 500 by selling short the 30% of stocks in the index that are deemed “unattractive,” according to the fund’s prospectus. Stocks are deemed “unattractive” by a methodology that calculates a stock’s expected risk-adjusted return in relation to a benchmark using 10 different factors, such as historical growth rates and earnings momentum. In this case, the roughly 137 stocks with the lowest score are sold short. Money from the short sales is reinvested in the remaining holdings to create a 100% net long exposure. Only listed in July 2009, the fund has gathered $28 million in assets and charges a 0.95% expense ratio.

S&P Senior Financial Writer Vaughan Scully can be reached at vaughan_scully@standardandpoors.com. Send him your ideas for ETF story topics.