Small-Caps Starting to Shine | ETF Trends

In what could be a crucial sign of broadening market leadership, small-caps are perking up in June, with both the Russell 2000 Index and the S&P SmallCap 600 Index higher since the start of the month.

An earnest small-cap resurgence could support more nuanced exchange traded funds, such as the Invesco NASDAQ Future Gen 200 ETF (QQQS). The Invesco ETF has already been a beacon of strength among small-cap assets, as it is higher by nearly 11% year-to-date, easily outpacing the aforementioned small stock benchmarks. Confirming it has June momentum, QQQS is up 6.11% this month, as of June 8.

Alone, that’s a positive for investors holding the ETF. In a broader sense, it’s encouraging because smaller stocks haven’t contributed much to upside this year. Actually, many stocks outside of the “magnificent seven” mega-cap growth stars haven’t contributed much to broader market upside since the start of 2023.

In what could spell more good news for QQQS, the Russell 2000’s “rally comes as investors worry about only a few artificial intelligence-related stocks rising while the rest of the market struggles. A breakout in small caps could point to broader market participation,” reported Fred Imbert for CNBC.

QQQS Could Be Positive Bellwether

Owing to the pacesetter status often ascribed to smaller stocks, the recent upside of QQQS and its counterparts could be particularly notable in the back half of 2023.

“Moreover, small-caps have traditionally served as a bellwether in terms of the broader economic landscape,” LPL Financial chief global strategist Quincy Krosby wrote in a recent report. “With all the ongoing debate regarding the state of the economy, and concerns about an impending recession, steady interest in small-caps suggests the economy is more resilient than the headlines imply, or that a recession could be milder than initially projected.”

Indeed, small-caps, including QQQS components, are economically sensitive assets. That could be a positive trait at a time when jobs growth is sturdy and some economists are paring recession forecasts. QQQS has some cyclical exposure, and its growth profile could be potent should the Federal Reserve hold off on raising interest rates for the remainder of the year.

Another potential benefit offered by QQQS is that the fund allocates over half its roster to healthcare stocks. Some small-cap healthcare names are widely covered on Wall Street, which isn’t the case across all small-cap sectors. That could signal upside if analysts bullishly revise ratings and/or price targets on QQQS healthcare components.

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