The Russell 2000 Index was lower by 6.73% over the past month and is flirting with a new bear market. So it’s easy for investors to be pessimistic regarding near-term prospects for small-caps equities and related ETFs.
Some market observers argue the recent repudiation of small-caps has been too harsh. They note small-caps could be primed for a rebound if interest rates normalize and economic data remains supportive. That could open the door to opportunity with ETFs such as the Invesco NASDAQ Future Gen 200 ETF (QQQS).
Earlier this year, small-cap equities and ETFs like QQQS were hamstrung by elevated fears that a recession was imminent. However, recent economic data appears to suggest otherwise. For example, the initial reading of third-quarter GDP out Thursday showed U.S. economic activity jumped 4.9% in the quarter.
“In the second quarter, real GDP increased 2.1 percent. The increase in the third quarter primarily reflected increases in consumer spending and inventory investment. Imports, which are a subtraction in the calculation of GDP, increased,” noted the Bureau of Economic Analysis.
Some Experts See Small-Caps Momentum
In a recent report to clients, Citi Wealth Management highlighted the value case for select smaller stocks, noting that small- and midcap names that can accurately be described as “high-quality” currently trade at a 30% to the large-cap S&P 500. History confirms those quality traits are worth embracing, particularly by long-term investors.
“Small and midcap stocks have outperformed in most decades over the past 100 years. And that’s been especially true of profitable small and mid-sized firms, which have outperformed their bigger counterparts since 1994,” reported Carl Hazeley for Finimize.
Another factor that could work in favor of QQQS is slowing inflation. Should the Consumer Price Index continue trending downward, that could pave the way for the Federal Reserve to pare interest rates at some point in 2024. Should that happen, risk appetite could be renewed and stoke interest in ETFs such as QQQS.
“And, sure, valuations alone aren’t especially good at predicting what’s going to happen over the short term, but Citi expects that inflation will moderate and lead to interest rate cuts next year. And that’s why it says it’s worth buying into small and midcaps now,” according to Finimize.
Lower rates are potentially beneficial to QQQS because the ETF has exposure to “long duration” sectors such as technology and consumer discretionary.
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