Broader gauges of small caps didn’t do much to brag about through the first two months of 2024. However, some market observers believe the asset class is poised for a turnaround.
Should that scenario materialize, exchange traded funds such as the Invesco NASDAQ Future Gen 200 ETF (QQQS) stand to benefit. As things stand today, QQQS has been an admirable performer among small-cap ETFs to start 2024. It gained nearly 3% while some traditional rivals are saddled with modest losses.
Some of the strength displayed by QQQS to start 2024 is attributable to a resurgence of biotech stocks. Why? Because it allocates almost 59% of its weight to the healthcare sector. Typically, the combination of that sector and small caps means large amounts of biotech exposure.
That’s a potential positive at a time when analysts believe the biotech rebound is just getting started. One of the reasons for that constructive outlook is the belief that mergers and acquisitions in the space will increase this year. That could be relevant to QQQS because some of its biotech holdings could be takeover targets.
More Reasons to Consider QQQS
A lengthy rebound by biotech stocks is just one reason to consider QQQS. Though potentially less material but relevant nonetheless is the point that small caps have lagged large caps for an unusually long stretch, indicating the former could be poised to get in gear. Then there are valuations.
“Valuations are compelling, too. In terms of price/earnings, small-cap valuations are low relative to their own history and large caps. Morningstar equity analysts’ stock-by-stock reviews of small caps’ price/fair value estimates also suggest they’re cheaper than large caps,” according to Morningstar.
Another sector-level catalyst for QQQS could be its nearly 25% weight to tech stocks. Small-cap tech stocks, like their peers from other sectors, have been left behind as large-cap equivalents moved higher. The struggles of small-cap tech are largely attributable to high interest rates, which weigh on the long-dated cash flows of these companies. That is to say, if inflation continues to cool and the Federal Reserve gives clear signs as to when it will cut rates, QQQS has clear leverage in those scenarios.
Arguably, QQQS is one of the small-cap ETFs that stands to benefit the most from lower interest rates because small-cap biotech and technology companies are usually research and development-intensive and need to access capital to fund those efforts.
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