That approach has its advantages but isn't always best.
WisdomTree is probably best known for its dividend ETFs, another form of fundamental weighting, but also offers ETFs based on the size of each company's earnings stream. Why? Because earnings ultimately give any stock its value.
Investors tend to be hopeful about their stocks, however, so it's common to see "popular" names grow far bigger than their earnings stream can justify.
Suppose, for instance, you have two companies. Both had net income of $10 billion last year. Both have the same number of shares outstanding. But one company trades at $25 while the other is at $75.
In a cap-weighted ETF, the portfolio will have three times as much allocated to the more expensive stock — even though it isn't generating any additional profits.
Under an earnings weighted approach, both stocks would have the same allocation because both are equally profitable.
WisdomTree implements this methodology in six domestic stock ETFs. It seems to work well. WisdomTree Earnings 500 (EPS), for example, holds the same 500 stocks as SPDR S&P 500 (SPY), and over the past 12 months, EPS has outperformed SPY by about 2 percent.
As I mentioned, earnings and dividends are just two factors that can be used to create fundamentally weighted ETFs. Check out Get Creative With Alternative Weightings ETFs in the Money and Markets archive to learn more.
Other sponsors also include earnings as part of their ETF weighting schemes. You may also want to check out the menu at Russell Investments. Their "Investment Discipline" ETFs use earnings as one of the stock-selection criteria for ETFs like Russell Growth at a Reasonable Price ETF (GRPC).
PowerShares has many ETFs in their lineup based on RAFI indexes, such as PowerShares FTSE RAFI US 1000 (PRF). The RAFI methodology doesn't target earnings directly, but their impact is taken into account via other factors.
If you want more earnings, then take a closer look at these earnings ETFs. One word of caution, though: Many investors have not yet discovered these gems. As a result, their liquidity can be quite low. Be sure to use a limit order if you decide to venture in, and monitor your investment closely.