Some investors are apprehensive about embracing new exchange traded funds, but most related concerns aren’t borne out in real time.
With that in mind, some ETFs that are fresh to the market are worthy of evaluation by investors. That group includes the Invesco NASDAQ Future Gen 200 ETF (QQQS). QQQS debuted earlier this month as the small-cap addition to Invesco’s suite of innovative QQQ funds, which includes famed products such as the Invesco QQQ Trust (QQQ), the Invesco NASDAQ 100 ETF (QQQM) and the Invesco ESG NASDAQ 100 ETF (QQMG).
Indeed, small-cap stocks and growth equities – the bulk of the QQQS portfolio – are struggling this year, but recent signs out of the small-cap space are encouraging. That could indicate QQQS is, at the very least, worthy of a look.
“After suffering bruising losses earlier this year, shares of many small, domestic-focused companies are outshining the large-capitalization stocks that dominate the U.S. equity markets. In October, the S&P 600 small-cap index has risen 5.3%, beating the large-cap S&P 500’s 2.6% increase. For the year, the S&P 600 is on pace to outperform the S&P 500 for the first time since 2016,” reports Hannah Miao for the Wall Street Journal.
One of the primary reasons market participants are renewing interest in small-cap stocks is that many of these firms derive significant portions of their revenue from inside the U.S. – a highly favorable trait at a time when the U.S. dollar ranks as the world’s best-performing major currency in 2022.
Translation: The more export-dependent a company’s top line is, the more vulnerable it is to a stronger greenback. However, that’s not a primary concern for many QQQS member firms.
“Smaller companies are more insulated from adverse foreign-exchange effects because they derive more of their business stateside. Companies in the S&P 600 generate just 20% of their revenue outside the U.S., compared with S&P 500 constituents that make 40% of sales abroad, according to FactSet,” reports the Journal.
Adding to the allure of QQQS is the point that its sector lineup is domestically focused. About 62% of the new ETF’s nearly 200 holdings hail from the healthcare and consumer cyclical sectors – groups that at the small-cap level usually generate the bulk of their sales within the U.S. Plus, small-caps are offering investors favorable valuations after declines experienced earlier this year.
“The valuations of small-caps look even more attractive when compared with large-cap stocks. The S&P 600 is trading at 10.8 times expected earnings over the next 12 months, according to FactSet as of Friday. That is below its 20-year average of 15.5 and well below the S&P 500’s forward price/earnings ratio of 15,” according to the Journal.
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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.