Most exchange traded funds (ETF's) determine the relative weight of each asset in the fund based on market capitalization. That is, the higher the so called free float market capitalization of a stock the higher its weighting in the ETF. Recent research has revealed that this weighting is suboptimal due to index-arbitrage strategies of individual traders.

Therefore many asset management firms have started fundamentally weighted ETF's. For these ETF's the weighting of each asset in the ETF is based on for instance total earnings, total dividends, price/earnings, price/sales etc.

An increasing number of ETF's invests around a specific thema. For instance in health care, energy, consumer goods etc. If there are many companies matching the investment thema well, then the thema-index can still be weighted based on fundamentals or market capitalization.

However some ETF's have a narrow thema, such as PowerShares Global Water fund (PIO), investing in the drinking water business. One of the problems there is that some companies in the water business are, for example, electricity suppliers as well. In that case every stock could be weighted based on the amount of revenue they generate in the water business. The good thing is that such weightings are not based on market capitalization, which is suboptimal. The bad news is that for thema index funds it is difficult to overweight the better performing companies in their index. Moreover if the thema is too narrow, it is difficult to select the investments such that a large part of the portfolio fits the definition of the thema.