The rules- or strategy-based ETFs offer individuals the opportunity to invest in styles and approaches that active managers tend to base their tactical portfolios on. Potential investors are able to benefit from the cheap and easy access to investment strategies that would likely require significant expense and time to mimic on their own. Of course, not every rules-based index approach is a winner, and investors need to do the normal due diligence in terms of understanding the strategy. Also, many financial advisors like to see a track record of at least three years before judging a strategy's success or failure.

Alternative weighting methodologies have been around for years, notably Rob Arnott's fundamental indexing methodology. The idea is to reflect the true underlying value of a company based on factors such as sales, cash flow, book value and dividends. Invesco PowerShares currently offers a suite of ETFs that try to reflect the RAFI Fundamental Indices, along with a suite of ETFs based on the Intellidex Indices.

The PowerShares DWA Technical Leaders Portfolio (PDP) is one of PowerShares' largest and most widely traded funds. It screens for U.S.-listed companies that demonstrate powerful relative strength characteristics from the underlying benchmark, pursuant to the Dorsey Wright proprietary methodology. This methodology analyzes individual stock performance compared to the benchmark index and the relative performance of the industry sectors and sub-sectors.

Along with PowerShares, Guggenheim Investments and WisdomTree Investments have also launched very successful rules-based funds. The Guggenheim Insider Sentiment ETF (NFO) reflects favorable corporate insider buying trends and upwardly revised earnings estimates on Wall Street. The WisdomTree Managed Futures Strategy Fund (WDTI), which has become a very actively traded fund in just 11 months since its inception, utilizes a quantitative, rules-based strategy that helps select long positions in a broad range of futures contracts that are showing positive momentum while shorting contracts that have underperformed.

While not as obvious as the fundamentally weighted indices, the equal-weighting methodology may arguably be a form of rules- or strategy-based methodology, albeit in a basic form. The indexing methodology allows for basic active management in rebalancing component holdings to reflect a specific strategy. For instance, the S&P 500 Equal-Weight Index is rebalanced quarterly to account for changes in stock components and to get back to the original weighting of 0.2% for each stock in the benchmark.

The evolution of indexing methodologies has been consistently moving away from the traditional market-capitalization method, and now a group of companies are beginning to take it a step further. Most recently, Russell Investments launched a line of strategy-based ETFs, including a low-volatility ETF strategy. The new ETF products were designed to help dampen the ups and downs from short-term market movements. While the strategies help mitigate losses in a large fall, these ETFs may also diminish gains during major stock market rallies. Nevertheless, some investors will be able to keep a toe in the markets with some downside protection and perhaps sleep better at night.

Russell Investments' new line of "Investment Discipline" ETFs attempt to follow specific strategies or "lenses" an active manager would normally follow, such as style, quality, sector and concentration, in an attempt to offer different investment philosophies with unique risk/return investment profiles. The funds screen constituent holdings through growth and valuation characteristics; earnings and balance-sheet characteristics; and exposures to various economic sectors. They are differentiated from the underlying benchmark with a number of individual components.

In an attempt to carve out market share in this nascent investment category, PowerShares, iShares and Direxion have also added their own suite of "smart" ETFs that follow strategies like low volatility, correlation, momentum or insider sentiment, covering various major indices. The new batch of "intelligent beta" or "smart beta" ETFs that try to mitigate the large market gyrations have accounted for around a third of total new ETF offerings since the start of October.

Still, investors need to be aware that these products are relatively new to the market. Potential investors should monitor the prospective ETF investments to see how they work and trade. For instance, how often a fund rebalances or reconstitutes individual holdings plays an important role in capturing returns on securities. Some indices are reconstituted monthly, while others may be quarterly, semiannually or even once per year.

With more providers expanding in this ETF space, actively managed strategies are alive and kicking, garnering a wide investment following. The new breed of rules- and strategy-based ETFs are an excellent addition to the ETF universe, providing investors with added diversification and investment options while adhering to specific investment strategies to navigate today's market environment.