Glimmers of Hope Emerge for Small-Caps | ETF Trends

Small-cap stocks and related exchange traded funds are taking a back seat to large-cap counterparts this year. The Russell 2000 Index has shed almost 5% over the past month. However, some market observers remain constructive on smaller stocks.

Should that view be validated, it could provide fuel for rebounds by ETFs such as the Invesco NASDAQ Future Gen 200 ETF (QQQS). The fund follows the Nasdaq Innovators Completion Cap Index. It may appear to be a growth play on small-caps owing to its Nasdaq-100 Index (NDX) DNA. However, it’s a blend fund with a mix of growth and value stocks.

That could be a source of allure for small-cap investors because the small-cap/value combination has proven potent over long holding periods.

Small-Caps Value Proposition Could Benefit QQQS

Regarding the small-cap value proposition, it’s arguably becoming too compelling to ignore. That could be a factor that works in favor of QQQS.

“We’re very attuned to the valuation discounts currently being afforded to small- and mid-cap stocks after protracted periods of underperformance relative to large-cap stocks,” Tom Ognar, senior portfolio manager at Allspring Global Investments, said in an interview with Weizhen Tan of CNBC.

The fund manager is constructive on smaller growth stocks, noting that group could benefit as more market participants look for growth opportunities beyond the large-cap space. QQQS has some leverage to that theme because about 22.5% of its holdings are classified as growth names.

Another reason QQQS could be in store for some near- to medium-term upside is the notion that the Federal Reserve could be nearing the end of its tightening cycle. Though that hasn’t been confirmed as of yet, speculation to that effect is rising. If history repeats, small-cap equities could generate upside in the months ahead.

That history is as follows: Small-cap stocks usually struggle in the months immediately following rate hikes. But a year past a rate hike, smaller stocks often find their stride and deliver noteworthy returns. Though the performance dips 18 months past a rate hike, it’s still positive. And three years past a rate hike, the historical performance of small-caps is usually stellar.

One way of looking at that track record is that QQQS doesn’t necessarily need rate cuts next year, though that would help. The ETF and small-caps merely need the Fed to cease hiking borrowing costs.

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