Small-cap stocks and related ETFs have garnered plenty of attention in 2023 — much of it for the wrong reasons.
Those include the group’s laggard status relative to less volatile large-caps, sensitivity to rising interest rates, and vulnerabilities to economic contraction. Regarding the last point, the good news is a recession hasn’t arrived; not yet anyway. And the soft landing thesis appears to have momentum. With 2024 right around the corner, that sentiment could prove beneficial to ETFs such as the Invesco NASDAQ Future Gen 200 ETF (QQQS).
Recently, the case for small-caps and funds such as QQQS has been buttressed by historically low valuations. Then there are the possibilities of a Santa Claus rally and the January effect. So it’s possible QQQS could be a near-term rebound story.
Credible Tailwinds for Small-Caps
Investors are right to scrutinize concepts such as the Santa Claus rally and the January effect. But the reality is there are more credible tailwinds for small-cap equities, including QQQS holdings. Those include the aforementioned possibility that the cyclical nature of the asset class could prove favorable if the economy holds steady or improves in 2024.
“This is a real piece of conventional wisdom in the investment world,” noted Morningstar strategist Dan Lefkovitz. “Small caps are perceived to be procyclical in nature. So more exposed to macroeconomic factors like changes in gross domestic products, interest rates, consumer demand, commodity prices. Small caps are certainly less diversified in their business models than larger caps and more domestically focused in their revenue.”
It’s also important to examine some of the other factors that have weighed on small-caps. Those include traditional small-cap indexes being overexposed to old-guard sectors. That’s not a problem for QQQS, which allocates over 36% of its weight to technology and consumer discretionary names. In fact, the ETF’s tech exposure could be a significant advantage going forward.
“I think that the most powerful theme powering U.S. equities and equities globally has been (technology),” added Lefkovitz.
Rather, the issue for QQQS has been its almost 55% weight to the healthcare sector. In small-cap territory, healthcare exposure often means biotech exposure, and biotech stocks have been out of favor for several years now. However, some experts believe biotech and life sciences are finally ready to rebound and 2024 could mark the start of that resurgence in earnest.
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