There are two ways to manage an ETF, Passive and Active.
ETFs are generally passively managed, which means they track a market index (such as the NIFTY 50, NIFTY BANK or S&P BSE Midcap) with the aim of replicating the performance of that index.
Let's take the example of an ETF that tracks an index containing the 50 largest companies on a stock exchange i.e Reliance ETF Nifty BeES. The ETF holds shares in each of the companies in proportion to the NIFTY 50 index (95-100%), so if the price of the shares in each of the companies goes up, the value of the ETF as a whole should go up as well, and vice versa.
Actively managed, ETFs are picked by fund managers, rather than track an index. The securities are chosen with a particular strategy with an aim to outperform the market.