Fundamental indexing is still pretty controversial in the investment world. But the early results have earned top marks from our ratings model.

Unlike typical indices, which weight constituent stocks according to their market capitalization, fundamental indices weight their holdings according to criteria such as the size of their dividends.

TheStreet.com Ratings initiated coverage of 41 exchange-traded funds and four closed-end funds that accrued a sufficient track record one year's worth of risk and performance data by the end of November.

Sixteen of the ETFs that began trading in October 2006 received our top rating of excellent, with five being awarded the top rating of A-plus. Of these, four are members of the WisdomTree family of fundamentally weighted ETFs. All four track international market sectors, including communications, utilities, oil and non-cyclical consumer stocks.

Jeremy Schwartz, deputy director of research at WisdomTree, says the funds hold a "unique slice of the market" for several reasons. First, they are the only pure play for international sectors among ETFs since they hold no U.S. stock exposure.

Second, stocks are selected for the underlying indices with a rules-based methodology without human interaction or prejudice.

But the most important difference between these ETFs and the other exchange-traded funds we rate is the way they weight stocks. Instead of giving the most weight to the stocks with the biggest market cap, WisdomTree ranks them by the total dollar value of dividends paid over the prior year. Dividends actually paid are shielded from potential accounting manipulation. Core earnings are substituted when measuring non-dividend-paying companies.

Schwartz notes that the average dividend yield for the universe of 2,500 international stocks eligible for inclusion in their indices is 3.8%. This compares favorably with the 2.0% dividend yield of the S&P 500 Index dominated by U.S. stocks.

The portfolio of the A-plus-rated WisdomTree International Communications Sector Fund ( DGG) scored a gross dividend yield of 4.26% as of Dec. 24.

The largest holdings had a great year, with Vodafone ( VOD) up 38.60%, Telefonica ( TEF - Get Report) up 44.82% and China Mobile ( CHL) up 126.10%, among others.

The A-plus-rated WisdomTree International Utilities Sector Fund ( DPN) has compiled a total return since inception on Oct. 13, 2006, through Nov. 30, 2007, of 43.05%. Schwartz says the fund was well positioned to benefit from the global infrastructure boom and the low-interest-rate environment.

In third place, the A-plus-rated WisdomTree International Consumer Non-Cyclical Sector Fund ( DPN) captured one-year returns of 22.99% in Nestle ( NSRGY), 45.17% in British American Tobacco ( BTI) and 26.86% in Unilever ( UN), all of which were among the funds six largest holdings.

The fourth-place, A-plus-rated WisdomTree ETF focuses on the International Energy Sector with top holdings of Total ( TOT), BP ( BP - Get Report) and CNOOC ( CEO). As part of a diversified portfolio, some exposure to the energy sector is a must-have while oil again flirts with $100 a barrel.

In total, TheStreet.com Ratings assigned buy ratings to 23, hold ratings to nine and sell ratings to the remaining nine exchange-traded funds.

TheStreet.com Ratings also initiated coverage on four closed-end funds. None of them fared well over the last year and all are starting off with a sell range.

The ( ETY) Eaton Vance Tax Mgd Div Eqty Inc (ETY) earned an initial rating of E, losing 12.26%.

Also rated E were the ( IRR) ING Risk Managed Nat Resources Fund (IRR), down 7.61%, and the ( FOF) Cohen & Steers Closed-End Opp Fd (FOF), off 13.09%.

The ( DHG) DWS Dreman Value Income Edge Fund (DHG) sank 26.86% in the 12 months ending Nov. 30, locking in the lowest possible rating of E-minus.

Research Methodology

TheStreet.com Ratings condenses the available fund performance and risk data into a single composite opinion of each fund's risk-adjusted performance. This allows the unbiased identification of those funds that have historically done well and those that have underperformed the market.

While there is no guarantee of future performance, these Investment Ratings provide a solid framework for making informed, timely investment decisions.

All the funds listed below have reached their one-year anniversary.

Funds rated A or B are considered buy-rated on the basis of a track record of higher-than-average risk-adjusted performance. Funds at the C level are rated hold, while underperformers at the D and E levels our model ranks as "sell."

TSC Ratings Has Initiated Coverage on These ETFs
Fund Ticker Initial Rating Inception Date Investment Style
WisdomTree Intl Communication DGG A+ 10/13/2006 Non-US Equity
WisdomTree International Utilities DBU A+ 10/13/2006 Sector - Utilities
WisdomTree Intl Cons Non-Cyclical DPN A+ 10/13/2006 Non-US Equity
WisdomTree International Energy DKA A+ 10/13/2006 Sector - Energy/Natural Res
PowerShares Cleantech Portfolio PZD A+ 10/24/2006 Equity Income
Rydex S&P Equal Weight Ind ETF RGI A 11/7/2006 Growth - Domestic
Rydex S&P Eq Wgt Con Staples ETF RHS A 11/7/2006 Growth - Domestic
PowerShares Dynamic Hlthcare PTH A 10/12/2006 Sector - Health/Biotechnology
Rydex S&P Eq Wgt Energy ETF RYE A 11/7/2006 Sector - Energy/Natural Res
WisdomTree Intl Health Care DBR A- 10/13/2006 Sector - Health/Biotechnology
Rydex S&P Eq Wgt Hlthcare ETF RYH A- 11/7/2006 Growth - Domestic
PowerShares Dynamic Industrials PRN A- 10/12/2006 Equity Income
PowerShares Dynamic Hlthcare Svc PTJ A- 10/12/2006 Sector - Health/Biotechnology
WisdomTree Intl Basic Materials DBN A- 10/13/2006 Non-US Equity
PowerShares WilderHill Progr Energy PUW A- 10/24/2006 Sector - Energy/Natural Res
PowerShares Dynamic Basic Materials PYZ A- 10/12/2006 Equity Income
Market Vectors Environment Ind ETF EVX B+ 10/16/2006 Equity Income
PowerShares Dynamic Energy PXI B+ 10/12/2006 Sector - Energy/Natural Res
WisdomTree International Industrial DDI B+ 10/13/2006 Non-US Equity
Rydex S&P Eq Weight Utilities ETF RYU B+ 11/7/2006 Sector - Utilities
Market Vectors Steel Index ETF SLX B 10/16/2006 Equity Income
PowerShares Dynamic Consumer Staple PSL B 10/12/2006 Equity Income
Rydex S&P Equal Weight Material ETF RTM B- 11/7/2006 Growth - Domestic
MACROshares Oil Up UCR C+ 11/29/2006 Sector - Energy/Natural Res
Vanguard High Dividend Yield ETF VYM C+ 11/10/2006 Equity Income
iShares KLD 400 Social Index Fund DSI C+ 11/17/2006 Equity Income
WisdomTree Intl Consumer Cyclical DPC C+ 10/13/2006 Non-US Equity
PowerShares Dynamic Technology PTF C 10/12/2006 Growth - Domestic
WisdomTree Intl Financial DRF C 10/13/2006 Sector - Financial Services
PowerShares Dynamic MagniQuant PIQ C- 10/12/2006 Equity Income
SPDR Russell/Nomura PRIME Japan ETF JPP C- 11/14/2006 Non-US Equity
PowerShares Dynamic Financial PFI C- 10/12/2006 Sector - Financial Services
Rydex S&P Equal Weight Tech ETF RYT D+ 11/7/2006 Growth - Domestic
WisdomTree International Technology DBT D 10/13/2006 Non-US Equity
PowerShares Dynamic Consumer Discr PEZ D 10/12/2006 Equity Income
PowerShares Dynamic Banking Portf PJB D- 10/12/2006 Sector - Financial Services
Rydex S&P Eq Weight Financial ETF RYF D- 11/7/2006 Sector - Financial Services
Rydex S&P Eq Wgt Con Disc ETF RCD D- 11/7/2006 Growth - Domestic
PowerShares Listed Private Equity PSP D- 10/24/2006 Equity Income
SPDR Russell/Nomura Small Cap Japan JSC E+ 11/14/2006 Non-US Equity
MACROshares Oil Down DCR E- 11/29/2006 Sector - Energy/Natural Res
Source: TheStreet.com Ratings

For a more detailed explanation of the meaning of each level of our rating, click here.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.