TheStreet.com Ratings initiated coverage of 21 exchange-traded funds and two closed-end funds that accrued a sufficient track record of risk and performance data by the end of October.

Eight of the ETFs that began trading in September 2006 received our top rating level of excellent. Six of them earned the highest possible A+ rating for risk-adjusted performance over the last year. Each fund tracked indices covering narrow sectors of our economy.

Several of the newly rated funds are members of the PowerShares family tracking FTSE Research Affiliates indices. The interesting wrinkle with FTSE Research Affiliates indices is how they decide on the weightings of each of the stock holdings within the index.

In the olden days, the purpose of indexing was to calculate a single statistic that could give you a good understanding of which way the market was heading. Bigger companies do represent more of the market than smaller companies. So, it was only natural that indices such as the S&P 500 would choose to use a market capitalization weighting, where big companies account for a larger portion of the index than smaller companies.

If instead the purpose of indexing is to allocate stock holdings by their best chances to go up in value, then bigger is not always better. PowerShares FTSE Research Affiliates attempts to use individual company fundamentals to make allocation decisions. The theory is that fundamentals such as book value, cash flow, sales and dividends may point to the better companies with higher probabilities of price appreciation.

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