You can always find examplesto prove the effectiveness of buy-and-hold investing . But unless you know exactly what you're doing, it's challenging to confidently construct a portfolio of long-term winning stocks. For those who prefer to steer clear of stock picking, exchange-traded funds(ETFs) provide the diversification benefits of index funds, with some of the convenience that comes from trading on stock exchanges.

Over the years, ETFs have become increasingly sophisticated. A "plain vanilla" ETF like the SPDR Trust tracks the market-cap-weighted S&P 500 index passively. But countless other ETF strategies have also become popular, from sector-specific ETFs to index ETFs that assign equal weightingsto each component. Some of those methods have been successful, while others have been disastrous for investors.

It's not always the thought that counts
One such disasteris the dividend-weighted ETF. In theory, emphasizing dividend-paying companies seemed perfectly sound. Yet during the bear market, dividend stocks were among the worst-hit victims, especially those in the traditionally high-yielding financial sector. Moreover, because some dividend-weighted ETFs only made changes to their holdings once per year, they often held stocks long after their dividends had been cut.

Weighting component stocks by dividend isn't the only way to invest, however. Equal-weight S&P ETFs have beaten their traditional market-cap-weighted S&P funds in recent years, helping to boost their popularity.

Is revenue better than dividends?
Another strategy that has had good success is to weight stocks by their total revenue. Unlike dividend-weighted strategies, in which some index components will be entirely left out if they don't pay dividends, a revenue-weighted ETF will always own at least a small portion of every stock of the index.

Revenue-weighted ETFs give companies with the highest revenue the most representation in the fund, making current stock price a lot less important than it is in a traditional market-cap-weighted index. In other words, a revenue-weighted fund determines a company's importance based on its ability to generate sales, rather than its current stock price and number of shares outstanding.

One fund company, RevenueShares, has specialized in ETFs using revenue-weighted strategies. The company has had great success with its mid-cap and small-cap funds, which have beaten their market-cap-weighted SPDR ETF peers by two and 10 percentage points, respectively, since they began trading early in 2008. In the large-cap space, though, the RevenueShares ETF has underperformed the S&P 500 by about three percentage points.

One reason for the disparity may be that with large-caps, revenues track market capitalizations fairly closely. Although the weighting schemes are far from identical, you'll notice that several companies appear in the top 10 using both methods:

S&P 500 Constituent

Revenues (Millions)

Rev Rank

Cap Rank

Wal-Mart (NYSE: WMT)

   403,447

1

3

Exxon Mobil (NYSE: XOM)

   346,875

2

1

Chevron (NYSE: CVX)

   184,125

3

13

General Electric (NYSE: GE)

   170,940

4

8

ConocoPhillips

   166,891

5

27

AT&T (NYSE: T)

   123,723

6

9

Hewlett-Packard (NYSE: HPQ) Continued...