Small-cap stocks and the related exchange traded funds have moved in fits and starts this year. However, some market observers believe that with a recession unlikely, the asset class could be poised for a period of smoother upside.
Should those outlooks prove accurate, the Invesco NASDAQ Future Gen 200 ETF (QQQS ) could be a prime example of a small-cap ETF winner. With more than 81% of its roster allocated to healthcare and technology stocks, QQQS has clear leverage to lower interest rates. In the small-cap universe, those are capital-intensive sectors that often finance operations with debt. Investors often inversely correlate small-cap companies to interest rates.
Lower interest rates could also spur increased consolidation activity in the biotechnology arena. This could be a catalyst for QQQS; many small-cap healthcare names are biotech firms. The interest rate catalyst is valid, but what’s important for investors mulling QQQS is that there are potential sparks for smaller stocks.
QQQS Tailwinds Could Emerge
Clearly, QQQS is sector-heavy at the top. It’s also possible some of the ETF’s smaller sector exposures could contribute to near- to medium-term upside.
“US small caps have underperformed US large caps, but so have most other major markets. In the US, the underperformance reflects the strong returns (at least until recently) of mega-cap US technology stocks. However, relative to the non-tech parts of the market, US small cap stocks have done well,” observed Daniel Morris of BNP Paribas.
Another point in favor of QQQS is that the U.S. economy, while cooling, is still growing and appears unlikely to enter a recession. That could support steady confidence among consumers, potentially bolstering the allure more domestically focused corners of the equity market. Small-caps check that box.
On a related note, Election Day is less than two months away and electoral politics can and do affect stocks. It’s likely the presidential election will be close. It’s outcome obviously isn’t known, but there are avenues through which small-cap stocks could benefit.
“As the US economy is still in growth mode, that positive performance should continue. If Donald Trump is re-elected to the White House, the prospect for higher tariffs (and hence greater demand for goods and services produced in the US) should provide a further boost to small-cap companies,” concluded Morris.
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