In an extension of a long-running theme, biotechnology stocks are disappointing investors again in 2025. Large-cap gauges addressing the industry have performed mostly in line with the S&P 500. That’s nothing to write home about because that index has been lower since the start of the year. Not surprisingly, baskets of small-cap biotech equities have performed worse than large-cap equivalents.
On the surface, that doesn’t provide market participants with much reason to consider small-cap healthcare stocks, particularly amid speculation that the U.S. economy is inching closer to a recession — a scenario that would likely plague small-cap names, regardless of sector.
That outlook, while rooted in the facts of the current state of small-cap affairs, may belie opportunity with ETFs like the Invesco NASDAQ Future Gen 200 ETF (QQQS ). QQQS, which follows the Nasdaq Innovators Completion Cap Index, isn’t a dedicated healthcare ETF, but it does it devote more than 48% of its roster to that sector, making it pertinent in the small-cap healthcare conversation.
Biotech Still Hub of Innovation
Given the post-coronavirus vaccine lethargy encountered by many biotech equities, some investors may be thinking the industry, including QQQS holdings, lost its innovative ways. That’s not the case. In fact, biotech remains a hub of innovation — sentiment that applies to some of the group’s smaller companies, too.
“There remains an abundance of innovation in the small-cap space, notably across the healthcare sector,” noted Vincent Nichols. “After all the genetic sequencing done over the last few years, some of the most impactful innovations will now likely come from translating that work into drugs over the next decade.”
Even with an encouraging outlook for ongoing innovation among small-cap healthcare firms, active fund managers often overlook the space due to low market caps or perceptions regarding volatility. That could be a sign that, for risk-tolerant investors, QQQS is valid for consideration as a satellite holding.
Additionally, QQQS could be at the right place at the right time if the Federal Reserve lowers interest rates. Not only would that help rate-sensitive small-cap biotech companies, it could finally spark a larger wave of consolidation in the healthcare sector — something investors have been waiting on for some time.
“Healthcare mergers and acquisitions have picked up notably recently as large cash-rich pharmaceutical companies face patent cliffs and are looking to backfill drug pipelines. They often pay substantial takeout premiums,” added Nichols. “The combination of likely rate cuts by the Fed, boardroom optimism and a measure of economic stability could lead to more widespread vibrant M&A.”
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