Small-cap stocks and ETFs appear to be finding solid footing. That’s an arguably surprising scenario given the reputation of summer months being trying for equities. Plus, recent economic data has been slack. That’s pertinent to investors considering small-caps because the asset class is economically sensitive.
Even with those headwinds, the Russell 2000 Index gained 3.33% for the month ending August 14. The Invesco NASDAQ Future Gen 200 ETF (QQQS) was even more impressive over that span, gaining 4.47%. It remains to be seen just how durable those gains are, particularly if economic data don’t improve. But QQQS could merit attention over the near term.
The Federal Reserve looms large in that scenario. Goldman Sachs recently noted the Fed could pare interest rates three times before the end of this year, and two more times in 2026. Such moves could be boons for QQQS. That’s because the ETF allocates more than 78% of its weight to healthcare and tech stocks. In the small-cap world, those are capital-dependent sectors with histories of being rate-sensitive.
QQQS: More Than an Interest Rate Play
With small-cap stocks and ETFs, it’s difficult to diminish the importance of interest rates, but assets such as QQQS offer more advantages beyond leverage to dovish monetary policy. Those perks include removing the stock-picking burden in a market segment where that task is difficult.
“Buying individual stocks comes with additional risks. If you own one stock (or even as many as 20 different stocks), you’ll be subject to stock-specific risk—meaning that the odds of things going poorly are much higher than they would be with a diversified portfolio,” noted Amy Arnott of Morningstar.
Additionally, QQQS is a passive fund. That’s a relevant attribute, because over the past few years, many active small-cap managers have struggled to beat their benchmarks.
“Index funds, on the other hand, harness the market’s collective wisdom about the relative value of each stock included in a given benchmark. They’re also cheaper: Investors in actively managed small-cap stock funds pony up annual expenses of about 100 basis points, on average, but the typical passively managed fund charges less than half of that,” added Arnott.
Of note to fee-conscious long-term investors is the fact QQQS is relatively cost-effectively. The ETF’s annual expense ratio is 0.20%, or $20 on a $10,000 investment. That compares very well with some of the highest-rated actively managed small-cap mutual funds, many of which charge 1% or more per year.
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