Through one month and a day of trading action in 2024, the Russell 200 Index is off 2.63%. That’s while large cap benchmarks are rallying. So it’s reasonable that some market participants are noncommittal regarding small caps.
But one month of struggles for small cap stocks doesn’t mean the 2024 case for the asset class is dead. Some experts believe the opposite is true. If that’s so, that could spell opportunity with ETFs likethe Invesco NASDAQ Future Gen 200 ETF (QQQS).
The fund turns two years old in October. It follows the Nasdaq Innovators Completion Cap Index. However, 148, or nearly 77% of the ETF’s holdings are members of the widely followed Russell 2000. That means the index can potentially provide relevant clues for investors considering QQQS.
Small Caps Inside QQQS
As has been widely reported, small cap equities, including QQQS components, are inexpensive. That’s not just conjecture, it’s supported by hard facts.
“From the end of July, the Russell 2000’s price-to-book fell by 16% to 1.8, which is close to the biggest discount to large caps on record. When small caps have traded at this type of discount in the past, they have historically gone on to deliver strong returns over the following 12 months and tended to outperform large caps,” according to BNP Paribas.
Of course, valuation alone isn’t the reason to buy QQQS or individual small caps. There are other factors that could create opportunity with the ETF. Those include strength among consumers, which could prove relevant, with QQQS allocating 34% of its weight to tech and consumer cyclical stocks.
“US consumer activity is still healthy, and services consumption has been steadily rising since the pandemic. The job market remains resilient and balance sheets among our US small-cap companies have remained healthy,” added BNP Paribas.
As noted by the bank, increased mergers and acquisitions activity could bolster small caps, particularly in the healthcare and tech sectors, which combine for over 83% of the QQQS portfolio. Add in improving earnings per share among smaller companies and the stage could be set for QQQS to rebound.
“We will see small caps begin to catch up, although this is hard to time. A discounted small cap valuation argument would have suggested a catch-up was due a year ago. We are still at extreme levels of valuation with the price-earnings ratio of small caps relative to large caps close to the lows of the past 20 years. We expect that gap to narrow,” concluded BNP Paribas.
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