Broadly speaking, small-cap stocks and the related ETFs frustrated investors this year. However, there’s hope (and more) for smaller stocks entering 2026. In fact, the asset class is already showing signs of strength. That’s highlighted by a 4.33% gain by the Russell 2000 Index over the past month. The Invesco NASDAQ Future Gen 200 ETF (QQQS) has been even better over that span, returning more than 6% while potentially signaling better things are in store for small-cap investors in 2026. If history holds true to form, QQQS could be an ETF to consider for 2026. Small-caps are typically responsive to interest rate cuts by the Federal Reserve.

“Since 1990, small-caps have outperformed large-caps on average in the one, three, six, 12, and 24 months after the Federal Reserve (the Fed) has cut interest rates,” according to Merrill. “Other factors that could contribute to their change in fortune are today’s increase in mergers and acquisitions activity and more accommodating regulatory policies.”

A Case for QQQS in 2026

As noted above, lower interest could support increased consolidation activity. That’s meaningful in discussing QQQS. The Invesco ETF allocates nearly 52% of its weight to healthcare stocks. Some of those are rumored to be takeover targets.

Also favorable for QQQS: undemanding valuations in this corner of the equity market, even with small-caps’ recent strength. That’s something to consider, because the ETF devotes nearly 71% of its weight to healthcare and technology stocks. In the small-cap realm, those sectors are often richly valued.

“Given their current low valuation, we see small caps as an asset class well worth exploring for both potential growth and diversification,” said Marci McGregor, head of Portfolio Strategy for the Chief Investment Office, Merrill and Bank of America Private Bank.

QQQS isn’t overly risky. However, it could also be supported in 2026 by market participants embracing risk in the small-cap space. If traders favor some of the most volatile smaller stocks, bidding those names, broader approaches such as QQQS could benefit.

“The fast-paced rally in small caps, sidelined for much of this year, has been fueled by a combination of falling interest rates and economic growth — dual tailwinds that many on Wall Street see as likely to propel the riskier group to market leading gains next year,” reported Bloomberg.

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