Small-caps and the related ETFs continue vexing market participants. However, credible reasons remain as to why investors shouldn’t be dismissive of this corner of the market.
In fact, ETFs such as the Invesco NASDAQ Future Gen 200 ETF (QQQS )| remain opportunity-rich and supported by arguably overlooked positive catalysts. Indeed, patience is required with small-caps and it cannot be ignored that mega-cap growth stocks are this year’s market leaders. However, that setup could be a “perfect storm” for sending smaller equities into the overlooked category.
Should market participants earnestly gloss over small-caps – arguably some are already doing just that – that could create opportunity for prescient investors to get in at compelling valuations.
Speaking of Valuations…
Regarding small-cap valuations, the fact remains the cost of admission with QQQS and the broader small-cap space is low.
“Large-cap stocks trade at a forward price-earnings ratio of about 21 as of June 28, according to Yardeni Research, compared to about 14 for small-cap stocks, the largest gap since the tech bubble of the late 1990s. Small-cap stocks outperformed large-cap stocks significantly in the aftermath of the tech bubble and lead up to the 2008 financial crisis,” reported Brian Baker for Bankrate.
One of the headwinds confounding QQQS and friends this year is that the Federal Reserve hasn’t lowered interest rates. That could soon change with Citi projecting eight straight rate cuts starting at the central bank’s September meeting.
“Some investors think potential interest rate cuts by the Federal Reserve could give a boost to small-cap stocks, which tend to be more economically sensitive than large-caps and more reliant on external financing,” according to Bankrate.
Specific to QQQS, there’s also an underappreciated artificial intelligence (AI)/small-cap story. That’s pertinent to investors considering QQQS because the Invesco ETF allocates 30.47% of its roster to technology stocks.
Additionally, QQQS is pertinent because the current environment makes stock-picking among smaller equities difficult. QQQS solves that burden.
“Small-cap stocks may be positioned for a run of outperformance after several years of trailing large-cap averages. If you’re interested in adding small-cap stocks to your portfolio, you have a couple of options to choose from. You may choose to pick individual small-cap stocks that you think will do well, or you can opt for an ETF that holds a basket of small-cap stocks,” concluded Bankrate.
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