Amid the resurgence by mega-cap growth stocks and havoc wrought by multiple bank meltdowns, small-caps are trailing their larger rivals.
For example, the Russell 2000 and S&P SmallCap 600 indexes are up an average of 2.65% year-to-date, as of April 4, while the large-cap S&P 500 was higher by 7.9%. Plus, both small-cap benchmarks showed significantly higher annualized volatility than the S&P 500. While those factoids don’t appear inviting for small-cap investors, they also arguably belie opportunity with smaller stocks.
With a decent amount of exposure to growth stocks and no exposure to financial services stocks, the Invesco NASDAQ Future Gen 200 ETF (QQQS) could be an attractive avenue for market participants looking to put capital to work with smaller equities. Some market observers believe the gap between small- and large-caps is unusually wide.
“Second, at 44% of the price of the S&P 500, the Russell 2000 recently hit a level that should mark a low point for the moment. The percentage hasn’t gone below that level since the first decade of this century, according to Evercore, which implies that if the broader market keeps bouncing, small-caps could easily outperform,” reported Jacob Sonenshine for Barron’s.
As noted above, QQQS has no exposure to financial services stocks — a perk of tracking an index that’s a descendant of the Nasdaq-100, which excludes that sector. However, that doesn’t diminish QQQS’s rebound potential as bank volatility ebbs.
“First off, the banking issue seems to have stabilized. Less money has been flowing out of banks in the last couple of weeks and banks are borrowing less from Federal Reserve facilities meant to ensure they have enough liquidity. That means fear of an economic crisis is fading, the perfect environment for a pop in small-caps,” according to Barron’s.
Another point in favor of QQQS is the following: It’s widely expected that if the economy materially slows later this year, the consumer cyclical sector could endure its shares of punishment. Fortunately, QQQS allocates just 7.74% of its roster to that sector. Technology and healthcare stocks combine for over 83% of the ETF’s portfolio.
The ETF’s significant healthcare weight under the umbrella of a smaller stock strategy is relevant because some of the fund’s holdings from that sector could prove sturdy in the face of a recession, taking their cues from clinical trial updates and mergers and acquisition activity.
QQQS holds 199 stocks, none of which exceed a weight of 1.61%.
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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.
