Yes, I think that toy's probably too big for a parrotlet. The wood is too large for him to chew and the cotton rope fibres are a bit of an entanglement danger. They can be deadly, once a bird has 'operated' on them for a short time. Natural wood is probably more fun for a parrotlet. See if there are any eucalyptus or apple trees in your area and snaffle some twigs (less than 1/2" in diameter). Tie them together in bundles with jute string or some veg. tanned leather and hang them near your perches.
My birds don't pay any attention to the kinds of toy in your pic. (They're larger parrots, though: Alexes and a Corella) Instead, they like to chew on big, hard hunks of timber, which I provide them. Also, cardboard boxes (with all sticky labels or tape removed). Madge can reduce a family sized pizza box to confetti in just twenty minutes! I guess what I'm saying is that home-made toys are often better, cheaper and more stimulating than the junk-on-a-string-type toys, which only offer the chance to preen and a do bit of nibbling.
Consider checking out bird toy parts on ebay. You can get thin wooden slats, either natural or coloured, which you can string together on paulie rope or clip to the cage with a carabiner. Egg cartons are great for chewing. A dry corn cob with a few kernels left on. Bits of broccoli. Even folded paper shapes. I imagine a parrotlet might have fun with, say, a toothpaste box or other similar small boxes (DO NOT give ones big enough to nest in, or you'll have Problems). We collect our ice-block (popsicle) sticks for the birds, who chomp 'em up happily.
I've never kept parrotlets, but our lovebirds are *amazing* when it comes to paper. They tear it up into long strips, then tuck it into their tail feathers and fly to a perch, where they will continue to shred each strip until it's only fibres on the floor. That suggests to me that paper is a great toy! I wrap a single seed into a small paper packet (times twenty or so) and then pop the little packets inside an egg carton. The Lovies have to burrow into the carton and then open the little packets in order to get their sweeties. It keeps 'em busy.
It's funny. Those of us with larger parrots often complain that all the toys out there seem to be for smaller ones, while those with small parrots think the opposite. You just have to be creative and watch your bird so you can find out what he likes to do best. Then, make/buy accordingly.
