Plenty of Tailwinds for Small-Caps as 2024 Starts | ETF Trends

For all the conjecture about small-caps stocks and related ETFs disappointing in 2023, the Russell 2000 Index still finished the year up 16.8%. Much of that upside was accrued in Q4 as the small-cap gauge surged 14%.

That performance badly trailed the large-cap S&P 500 on an annual basis. But recent momentum for smaller stocks is stoking optimism the asset class could be a leadership group in 2024. Should that play out, funds such as the Invesco NASDAQ Future Gen 200 ETF (QQQS) stand to benefit.

QQQS closed 2023 on a strong note, gaining 11.39% in the fourth quarter. That could pave the way for a strong showing to start 2024. More importantly, there are credible fundamental factors that augur well for small-cap momentum this year.

QQQS Could Be Small-Caps Winner in 2024

With the arrival of January comes talk of the January Effect — the scenario in which small-caps lead to start the new year, potentially setting the stage for more of the same over the course of the year. Rareview Capital founder Neil Azous said that scenario bears monitoring right away.

“US small caps are the most talked about equity index to start 2024,” he noted. “How this proxy moves in the first two weeks of the year will likely foreshadow whether a more intermediate-term trend higher develops.”

Azous also observed that how small-caps open 2024 could bring meaningful capital allocations. That’s because some professional investors are currently more heavily allocated to smaller equities than they are to asset classes such as business development companies (BDC), private equity, and venture capital. If smaller stocks disappoint early this year, pros could depart this corner of the equity market.

That ominous situation may not materialize. And adding to the allure of ETFs such as QQQS as potential winners this year is Azous calling small-caps a “fat pitch” trade. He noted that the Russell 2000 Index is trading at valuations last seen in 1999. Following that trough, the index went onto to outperform in mighty fashion.

He brought up another important point that’s relevant to investors considering QQQS. Smaller stocks are not included in the MSCI All Country World Index (ACWI) — a benchmark followed by many professional investors. However, domestic smaller stocks have long been important contributors to broader global equity returns.  That indicates many professional investors need to make an “active management” decision to embrace small-caps.

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