Nearly halfway through 2022, plenty of investors by now know that large- and mega-cap growth stocks are out of favor.
With that being the case, it’s understandable that many market participants are ignoring smaller growth names, many of which carry the “disruptive” and “innovative” labels. Typically, these stocks are more volatile than their larger peers, and avoiding volatility is a fine idea in the current environment, but investors shouldn’t outright forget about strategies such as the Invesco NASDAQ Next Gen 100 ETF (QQQJ).
Home to nearly $873 million in assets under management, QQQJ follows the NASDAQ Next Generation 100 Index, which is essentially the proving ground for admittance to the famed Nasdaq-100 Index (NDX). The average market capitalization of QQQJ’s 99 holdings is $19.64 billion, according to Invesco data, meaning that plenty of the fund’s components dwell in mid-cap territory or at the lower end of the large-cap spectrum.
That’s usually where credible innovators are found, and it explains why many QQQJ member firms are scuffling this year.
“Many high-growth companies that invest heavily in products and sales capacity are longer duration assets with a higher portion of their projected cash flow generation further into the future than is the case with more stable growth and value companies. These stocks have recently undergone a significant contraction of their price/earnings multiple,” according to BNP Paribas research.
While exchange traded funds such as QQQJ face near-term challenges owing to a less-than-hospitable macroeconomic environment, the long-term outlook for disruptive growth strategies is compelling. That allure is arguably enhanced by this year’s rapid valuation decline among QQQJ member firms.
“Despite these risks, we see many reasons for optimism. We are confident in several long-term secular growth themes that are driving the digital transformation of the economy. We believe companies will continue to invest if they see digital transformation as an imperative to remaining competitive,” added BNP Paribas.
There’s no denying that QQQJ is a growth-heavy fund. It allocates almost 39% of its weight to technology stocks, while consumer discretionary and communication services names combine for 26%. The healthcare sector accounts for over 19% of the fund’s weight, confirming that QQQJ has plenty of breadth when it comes to capitalizing on the expansion and intersection of disruptive trends.
“Disruptive technology trends are enabling the creation of new products, services and business models. They are making operations more efficient. In short, they are transforming the way we live and work,” concluded BNP Paribas.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.