In December, Market Insights noted how money was shifting away from large, well-known companies to smaller and less-known companies.
That trend paused during earnings season as quarterly reports focused attention on mega-caps like Apple (AAPL) and Alphabet (GOOGL). But now most big names have reported and now smaller stocks are starting to outperform again.
A few ETFs illustrate the trend. The Invesco QQQ Trust (QQQ) tracks the Nasdaq-100, or the 100 largest companies on the exchange. Invesco Nasdaq Next Gen ETF (QQQJ) holds the next 100 stocks by market cap. Big members include CrowdStrike (CRWD) and Roku (ROKU).
Another is the First Trust Nasdaq Equal-Weighted ETF (QQEW). This allocates capital equally to members of the Nasdaq-100, which means a giant name like AAPL has similar representation as a smaller firm like eBay (EBAY).
First Trust Nasdaq Equal-Weighted ETF (QQEW), daily chart, with relative strength vs QQQ.
When QQQJ and QQEW outperform QQQ, it means smaller companies are outperforming. As these screenshot demonstrates, small companies fell behind the megacaps in late January but are now showing signs of a comeback.
The S&P 500 shows a similar pattern. The ETFs to compare are the SPDR S&P 500 (SPY) and the Invesco S&P 500 equal weighted ETF (RSP).
Overall, small-company outperformance can be positive for the market because it may show investors aren’t over-concentrated in a handful of names.
This article was written by David Russell, TradeStation Securities, Inc., part of the Monex Group Inc, published on 05/02/2021.
David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.