Trying To Reserve Judgment On A New ETF

Scores of new exchange-traded funds are constantly coming to market and the pace of new product introductions has been brisk to start 2017. As 2017 goes along and more new ETFs debut, this year will likely play out in similar fashion to previous years for rookie ETFs.

Some new ETFs will gain immediate traction with investors while some will take a little longer to gain legitimate followings. Others will so consistently struggle to gain a following that those funds will be at risk of their respective plugs pulled. Regardless, it is probably too early to pass judgment on any of the ETFs that have launched this month.

AltaVista Rates Underweight

However, the O'Shares FTSE Russell Small Cap Quality Dividend ETF (NYSE: OUSM), which debuted earlier this month, drew an Underweight rating from AltaVista Research. AltaVista's Underweight rating on OUSM is part of 39 new ratings on ETFs, most of which have debuted in recent months, that the research firm unveiled on Monday.

To be fair, AltaVista is not signaling out OUSM. The research firm applied just one overweight rating to the 39 new ETFs it rated, but doled out 25 underweight ratings, including the one on OUSM. Underweight is the research firm's worst rating. AltaVista has an avoid rating, which was applied to one new ETF.

“Typically, funds in this category consist of stocks trading at relatively expensive valuations and/or having below-average fundamentals,” said AltaVista of its underweight rating.

OUSM And Strategy

OUSM's underlying index “is designed to reflect the performance of publicly-listed small-capitalization dividend-paying issuers in the United States exhibiting high quality, low volatility and high dividend yields, as determined by FTSE-Russell. The quality and low volatility factors are designed to reduce exposure to high dividend equities that have experienced large price declines, as may occur with some dividend investing strategies,” according to O'Shares.

Again, investors should remember that OUSM is a brand-new ETF and that AltaVista is not overtly saying anything negative about the ETF's long-term prospects. In fact, seasoned small-cap investors know that combination of dividends and small-caps can help reduce the volatility often associated with smaller stocks while potentially boosting long-term returns.

As of December 31, over 35 percent of OUSM's weight was allocated to real estate and consumer discretionary stocks, according to issuer data. The ETF holds nearly 340 stocks.