Investors waiting on small-cap equities and related ETFs may be encountering a “Waiting for Godot” moment. That’s because it feels like a while since small-caps have offered good reason to peer away from large-caps.
Fortunately, the equation for small-caps righting their respective ship isn’t complex. If it comes to light, it could benefit ETFs such as the Invesco NASDAQ Future Gen 200 ETF (QQQS). As is widely noted, small-cap stocks, including QQQS components, are economically sensitive. That implies the sturdier the domestic economy, the more support there could be for smaller equities.
The Russell 2000 Index is currently residing about 20% below its 2022 highs. So opportunity could be beckoning with small-caps and funds such as QQQS. But there are some factors for investors to ponder.
Experienced investors know that in an economy with the size and scope of the U.S., how capital is deployed can have meaningful effects on risk assets. Translation: Spending is usually positive, but the sources of those expenditures are important to small-caps.
“While some think this is an opportunity, our view is that we need more confirmation that we’re headed for a higher nominal growth regime driven more by the private economy rather than inefficient government spending,” noted Mike Wilson, chief investment officer and chief U.S. equity strategist for Morgan Stanley.
Private sector spending trends are crucial when considering the case for QQQS. That’s because the ETF lives up to its innovative billing by allocating nearly 84% of its weight to healthcare and technology stocks. In the small-cap arena, those are research-and-development-intensive firms. And if they’re pouring money into their respective businesses, it could signal weakness in the broader economy.
On the other hand, QQQS’ growth profile, though not overwhelming, could be an attractive trait for investors concerned by bumpiness in a late-cycle economic environment. History proves that when economic growth is lethargic — a point that remains to be seen — growth equities can provide ballast to portfolios. More than a quarter of the 2024 holdings in QQQS are classified as growth fare.
“As we’ve discussed in the past, small caps are particularly economically sensitive and reliant on pricing power to offset their lack of scale,” added Wilson.
QQQS turns two years old in October. It has an annual expense ratio of 0.20%, or $20 on a $10,000 investment.
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