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AI has weighed on this sector, but it could be a major growth catalyst.
Artificial intelligence (AI) holds a lot of promise for businesses. Many investors see generative AI unlocking significant productivity gains and saving lots of money on overhead.
A growing narrative among investors is that businesses will be able to replace many of their enterprise software packages with a single powerful AI tool. As a result, many software stocks have seen their share prices collapse, as investors lose faith in their ability to grow revenue and earnings long term.
The iShares Expanded Tech-Software Sector ETF (IGV +0.79%) has dropped 18% from its high reached last fall. But revenue growth among its components remains relatively strong, and the impact of AI on its business seems to be a net positive so far and for the foreseeable future. As such, it could be a great way to invest in artificial intelligence despite the growing concern that AI will negatively affect many of the businesses in the fund.
Image source: Getty Images.
What's inside the ETF?The iShares Expanded Tech-Software Sector ETF tracks a group of North American software companies. Its biggest components are some of the biggest winners from the excitement around artificial intelligence, including Microsoft, Palantir Technologies, and Oracle. Those three combine to account for about a quarter of the ETF's value.
But the remaining three-quarters of the exchange-traded fund hasn't all been as blessed by AI investors. Stocks such as Salesforce, Intuit, and Adobe are also found in its top 10 holdings. Fears that AI could displace the need for their software have negatively affected the earnings multiples investors are willing to pay for those stocks.
But concerns that a single generative AI application can displace specific pieces of enterprise and professional software are overblown. You wouldn't hire a generalist to do a specialist's job, especially when the price difference is relatively negligible for an enterprise. Few managers are going to risk their jobs by trying to transition a company from its current set of software solutions to a new AI solution because it could potentially save a few bucks for the company.
iShares Trust - iShares Expanded Tech-Software Sector ETF
Today's Change
(0.79%) $0.77
Current Price
$97.71
Meanwhile, most software providers are working to integrate AI capabilities into their offerings. Not only has that made them more competitive and compelling for new customers, but it can also increase the overall revenue per seat.
AI investors have seen the impact of integrating generative AI into Microsoft's and Palantir's enterprise software offerings. Palantir's AI Platform has rapidly expanded its use cases and lowered the learning curve, enabling tremendous sales growth. While the results might not be quite as dramatic at other software companies, new generative AI features have been a great way to grow revenue for most over the past few years.
For investors who want a simple way to invest in the beaten-down software industry, expecting the current narrative to fade and real financial results to win out, the iShares ETF provides an easy way to do so.
Adam Levy has positions in Adobe, Microsoft, and Salesforce. The Motley Fool has positions in and recommends Adobe, Intuit, Microsoft, Oracle, Palantir Technologies, and Salesforce. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft, long January 2028 $330 calls on Adobe, short January 2026 $405 calls on Microsoft, and short January 2028 $340 calls on Adobe. The Motley Fool has a disclosure policy.