Equities with the “disruptive” and “innovative” labels are being pinched to start 2022 amid inflationary pressures and fears of rising interest rates.
It appears that those fears will soon be realized as the Federal Reserve hinted on Wednesday that it will start hiking rates “soon.” Conversely, the Fed’s 2022 rate hiking plans have been known for some time, and with 10-year Treasury yields already rising, pricing in rate increases, some market observers believe that innovative stocks could rebound later this year. If that prediction is accurate, it could benefit exchange traded funds such as the Invesco NASDAQ Next Gen 100 ETF (QQQJ ).
The $1 billion QQQJ follows the NASDAQ Next Generation 100 Index, which is essentially the proving ground for admittance to the Nasdaq-100 Index (NDX). NDX itself is home to an array of innovative companies, so it’s reasonable to surmise that the same is true of QQQJ and its index, but components in QQQJ lack the market capitalization heft found in NDX.
With some market observers expecting that the market cycle from here will be driven by more attempts to generate alpha, QQQJ could bloom later this year as investors digest rate hikes.
“We believe we are in a correction within a bull market cycle,” Peter Oppenheimer, Goldman Sachs’ chief global equity strategist, says in a report out Wednesday. “In our view we remain in the early part of the Growth phase – returns will likely be low from here, but the bull market should continue (so long as economies grow).”
Oppenheimer highlights some “innovators” and “disruptors” that are down 20% to 50% from 2021 highs. Not surprisingly, many of those names reside in the technology and communication services sectors, which combine for half of QQQJ’s weight.
For now, tech is weighing on QQQJ. However, some experts point out that while tech isn’t likely to be the best-performing sector against the backdrop of rising rates, it’s unlikely to be the worst, either. In fact, some market participants argue that due to the emergence of disruptive technologies and rising tech investment by corporations and governments, tech could prove surprisingly resilient during this tightening cycle.
“Our view is that in a more inflationary world, with a broadening of the digital revolution across virtually all industries, coupled with a new focus on de-carbonization and significant capex requirements, investors should be looking for a more eclectic mix of companies,” concludes Oppenheimer.
QQQJ holds 105 stocks, none of which exceed a weight of 2.35%.
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