Following an impressive run in January and February, the past two-plus months have been unkind to small-caps as the Russell 2000 Index is saddled with an 11.41% fall over the past 90 days. That’s correction territory.
The silver lining is that with small-caps having already endured a correction, a rebound could be in the offing, and that’s the exact scenario that some market observers argue could come to pass. That would benefit a slew of exchange traded funds, including the Invesco NASDAQ Future Gen 200 ETF (QQQS).
QQQS could be a durable way of accessing smaller stocks for an important reason: It has no exposure to the financial services sector — the primary culprit behind the recent weakness in small- and mid-cap equities.
“Small and mid-cap shares underperformed for two reasons. First, they have a larger share of financial service stocks than their larger peers,” according to CME Group. “Secondly, the failure of Signature Bank and SVB hit small banks and smaller tech firms much harder than it did large banks and large tech firms.”
That lack of financial services exposure is relevant when considering that the S&P SmallCap Index allocates about 16% of its weight to that sector and because smaller banks, even the supposedly sturdier ones, are experiencing deposit flight. Fortunately, QQQS isn’t directly exposed to that trend. Historical precedent could prove to be another point in favor of the Invesco ETF.
“There is a consistent theme here: small caps tend to outperform during periods of turbulence that feature volatile interest rates and inflation, and economic downturns as well as early-stage economic recoveries. By contrast, large caps have tended to outperform during the later stages of economic recoveries,” added CME Group.
Small-Caps Tilt Within QQQS Portfolio
QQQS allocates about 8.5% more to value stocks than it does to growth names. That matters because smaller growth companies often need access to capital, which is far from guaranteed in the current environment.
Even with a lower weight to growth than value stocks, tech still figures in the QQQS equation. Tech stocks account for 28.55% of the ETF’s weight.
“The tech sector performed strongly during the 1990s and again from 2010-2021. However, it underperformed sharply between 2000 and 2009, and again in 2022,” concluded CME.
QQQS’s 54.70% weight to healthcare stocks somewhat offsets that risk. As such, the ETF could be a less risky option for investors looking for exposure to the high-octane healthcare segment.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
