Small-cap stocks and related ETFs have spent considerable time tantalizing and tormenting investors. So it’s understandable market participants may be leery of the asset class.
Reservations, while warranted, don’t change the fact that the Russell 2000 Index gained 6.08% last week. That’s an impressive weekly run, but some ETFs far exceed that pace. For example, the Invesco NASDAQ Future Gen 200 ETF (QQQS) surged 10.44% last week. It remains to be seen if this time will indeed be different for ETFs such as QQQS. But there is some anecdotal evidence indicating smaller stocks could be in for more upside. Consider the rarity that occurred last Thursday highlighted by Bespoke Investment Group.
“There’s been just one other trading day since 1979 when the small-cap Russell 2,000 rose 3%+ while the S&P 500 was down on the day,” Bespoke said in a post on X.
QQQS Could Be Primed for More Upside
As Bespoke noted, it had been nearly 16 years since that event occurred. That’s an interesting historical footnote. But investors considering QQQS are right to demand more concrete evidence that something more substantial could be afoot for small-caps.
Some of that evidence is seen in the technicals. Last Friday, small-cap benchmarks followed through on the prior day’s gains. QQQS gained 1.85% last Friday, but it did so on volume that was more than 36x above the daily average. That could signal investors are rotating out of large-cap tech stocks and are displaying some budding commitment to smaller equities.
Perhaps adding some support to the case for QQQS are increasing hopes that the Federal Reserve has the leeway to deploy multiple interest rate cuts before the end of this year. Recent inflation data suggests that’s a possibility.
“Investors appeared less worried about Friday’s hotter-than-expected PPI numbers after Thursday’s cooler-than-expected consumer price index (CPI) had boosted confidence that inflation was coming under control,” reported Reuters.
The interest rate/small-cap story has been rehashed time and again this year. But that’s legitimate regarding QQQS. The ETF allocates more than 80% of its portfolio to healthcare and technology stocks, some of which aren’t yet profitable. Plus, in the small-cap space, many companies in those sectors are capital-needy, meaning high interest rates are drags on their expansion and research and development efforts.
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