Small-Caps Gain Appeal Against Larger Peers | ETF Trends

In the first few months of 2023, small-caps struggled mightily against their large-cap rivals, but smaller stocks recently cobbled together some momentum. Some market observers believe that the scenario has durability.

If that outlook proves accurate, exchange traded funds such as the Invesco NASDAQ Future Gen 200 ETF (QQQS) stand to benefit. QQQS follows the Nasdaq Innovators Completion Cap Index, which is something of an extension of the large-cap Nasdaq-100 Index (NDX).

However, that genealogy doesn’t imply that QQQS is a growth-centric ETF. Arguably, the opposite is true. More than 35% of the fund’s 201 components are classified as value stocks, while fewer than 23% bear the growth designation. That’s a potentially notable trait at a time when small-caps are dramatically undervalued relative to large-cap peers.

Valuation Could Play in Favor of QQQS

It’s clear there’s a budding valuation case in favor of small-caps, and if it blooms in full, QQQS could be one of the ETF beneficiaries.

“So you have clear valuation appeal on small cap, and that’s one of the charts I have on small versus large, going back 30 years, showing we’re at the most discounted levels that we’ve seen since the tech bubble, the lows of the past five or six years,” noted RBC Capital Markets Head of U.S. Equity Strategy Lori Calvasina in an interview with Yahoo Finance Live. “That’s the top chart people ask me for on small cap right now, and it’s coming up as people are preparing their second-half outlooks.”

In other points that could be relevant to investors considering QQQS, Calvasina pointed out that large- and mega-cap equities are losing the stranglehold they held over markets earlier this year, and there’s evidence of a rotation out of growth funds into more value-oriented fare.

“So you can see actual retail investors starting to move that money around and chasing the valuation opportunities. And I think the other thing that comes up a lot is a balance sheet,” she said in the interview.

While it’s unlikely to happen anytime soon, an interest rate cut by the Federal Reserve could be another catalyst for small-cap stocks and ETFs such as QQQS.

Small-cap management teams “loaded up on long-term debt at low interest rates back before the Fed was hiking, and they’re benefiting from that now. The effect of the interest rate of the Russell 2000 right now is only about 4.1%. That blows people’s minds when you tell them that,” concluded the RBC strategist.

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