Why Software ETFs Are Suddenly Beating Semiconductors — and How the Top Funds Compare

ETF.com Staff

Tue, September 1, 2026 at 10:49 PM GMT+3 8 min read

Technology

It's crucial to separate two very different time frames, because they tell opposite stories. On a year-to-date basis, semiconductors still dominate: semiconductor ETFs like SOXX and SMH are up roughly 50% to 70%+, while the flagship software ETF, IGV, spent much of the year underwater, down double digits at points as investors dumped software on fears that AI would disrupt SaaS business models.

But on a month-to-date and recent-trend basis, the leadership has completely reversed. Over the past several weeks, software ETFs have sharply outperformed chip ETFs. In August alone, software crushed semiconductors in what analysts called a record divergence. 58 of 61 major chip stocks fell while the software winners posted enormous monthly gains. If you're looking at the last month rather than the last year, software is winning decisively.

Why Are Software ETFs Beating Semiconductors Right Now?

1. Valuations Flipped the Trade

After a monster first half, chip stocks became expensive with some names trading at extreme forward multiples (Intel at one point traded near 79x forward earnings). Meanwhile, software had been sold off hard earlier in the year on AI-disruption fears, leaving many SaaS names historically cheap. When the growth is comparable but one side is pricey and the other is discounted, money typically rotates toward the discount.

2. The AI Trade Is Broadening From Hardware to Software

The first phase of the AI boom was about building the infrastructure — the chips, the data centers, the memory. That phase overwhelmingly rewarded semiconductors. The market is now shifting to the next question: who actually monetizes AI? Increasingly, the answer points to the application and software layer — the companies embedding AI into enterprise products and charging for it. That thesis flows directly into software ETFs like IGV, SKYY, and WCLD.

3. Crowding and Profit-Taking in Chips

Semiconductor indices had become historically top-heavy and crowded, with concentration metrics near record extremes. When a trade gets that crowded, it becomes vulnerable to a sharp unwind, exactly what the August sell-off in chips looked like. Investors took profits in their biggest winners and redeployed into the laggard.

4. Software Fundamentals Reasserted Themselves

The bearish case earlier in 2026 was that AI would gut software companies. Recent results suggested the opposite: many SaaS firms are adding AI-driven revenue rather than losing business to it. As that fear faded, the beaten-down software names re-rated significantly higher. Palantir, Salesforce, ServiceNow, CrowdStrike, and Atlassian all posted double-digit-to-triple-digit monthly gains.

5. A Record Divergence Snapped Back

The performance gap between chips and software had stretched to never-before-seen extremes. Gaps that wide rarely last, and when mean reversion kicked in, the snapback has been violent because so much money was positioned on one side of the trade.

Software ETFs vs. Semiconductor ETFs: The Comparison

Here's how the leading funds on each side of the trade compare:

The Software Side: IGV, SKYY, WCLD

IGV is the heavyweight and the cleanest way to play the software rotation. It holds large-cap software leaders — Palo Alto Networks, Palantir, Microsoft, CrowdStrike, Oracle, Salesforce, and ServiceNow with the top 10 making up roughly 60% of the fund. That concentration means IGV captured the August surge in exactly the names that led it. SKYY offers broader, more balanced cloud exposure across infrastructure, platform, and software providers at a higher 0.60% fee. WCLD takes an equal-weight approach focused on smaller, emerging SaaS companies, giving it the most exposure to the high-beta names that snap back hardest in a software rally — though it's a much smaller fund.

The Semiconductor Side: SMH and SOXX

SMH is the largest and most concentrated chip ETF, with Nvidia near 18% and the top five holdings around 44% of the fund. That concentration made it a rocket in the first half and left it exposed when the megacap chip names cracked. SOXX holds 30 names with a more balanced weighting, capturing a wider slice of the chip supply chain. Both remain far ahead of software on a YTD basis, but both gave back ground during the August rotation.

What Should ETF Investors Take Away?

The rotation doesn't mean the AI trade is over but instead that it's maturing and broadening. Investors are no longer betting only on the companies that build AI hardware; they're increasingly betting on the ones that sell AI-powered software. For portfolio construction, that argues for owning both sides of the trade rather than trying to time the switch: semiconductors for the infrastructure layer, software for the monetization layer.

Two cautions. First, rotations can reverse as fast as they arrive — a strong chip earnings season or a software stumble could flip leadership back. Second, don't confuse a one-month move with a permanent trend: YTD, semiconductors still lead decisively, and software's snapback came off a deeply depressed base. The smart framing isn't "software instead of chips" — it's understanding which phase of the AI cycle each side reflects.

Frequently Asked Questions

Why are software ETFs outperforming semiconductor ETFs? Over the past month, investors rotated out of expensive, crowded chip stocks and into beaten-down software names as the AI trade broadened from hardware to the software layer that monetizes AI. Valuation, profit-taking in chips, and stronger-than-feared software fundamentals all drove the shift.

Are software ETFs beating semiconductors for the year? No. Year-to-date, semiconductor ETFs like SOXX and SMH are still far ahead. The software outperformance is a recent, month-to-date trend, not a full-year one.

What is the best software ETF to play the rotation? IGV is the largest and most liquid, concentrated in the large-cap software leaders that drove the August rally. SKYY offers broader cloud exposure; WCLD gives equal-weight exposure to emerging SaaS names.

What is the best semiconductor ETF? SMH is the largest and most concentrated (Nvidia-heavy); SOXX is more balanced across the chip supply chain. Both have led the market YTD despite the recent pullback.

After a year of semiconductor dominance, software ETFs have suddenly seized leadership — driven by a valuation-and-crowding rotation and a maturing AI trade that's shifting from who builds the chips to who monetizes the software. On a month-to-date basis, IGV and its peers are outrunning SMH and SOXX by a wide margin. But year-to-date, chips still lead, and the rotation could turn again. The lesson for ETF investors: the AI trade now has two distinct halves, and owning both — infrastructure and software — may beat trying to guess which one leads next.

Data as of late August / September 2026. Performance, holdings, expense ratios, and AUM are approximate and subject to change. Past performance does not guarantee future results. This article is for informational purposes only and does not constitute investment advice.

This article was generated with the assistance of artificial intelligence and reviewed by ETF.com staff.

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