Software stocks are pulling out of a rough start to 2026 as the AI trade rotates away from chipmakers. The iShares Expanded Tech-Software Sector ETF (IGV) has climbed 15% this quarter while the VanEck Semiconductor ETF (SMH) has dropped 14%, a reversal from the first half of the year. David Dierking, writing for The Motley Fool, argues the shift could make IGV, not another chip fund, the next leg of the artificial intelligence trade.
The iShares Expanded Tech-Software Sector ETF has climbed 15% this quarter while the VanEck Semiconductor ETF has dropped 14% over the same stretch. Motley Fool writer David Dierking says the reversal could mark software's turn to lead the next phase of the AI trade after Nvidia (NASDAQ: NVDA) has been one of its biggest beneficiaries.
That reversal follows a punishing first half. IGV fell more than 14% through the end of June, even as SMH gained more than 80% in the same period. The fund now holds $14 billion in assets, with Palantir, Palo Alto Networks, and Microsoft as its three largest positions.
Fears about AI replacing developers have eased
Software lagged early in the AI boom because many investors believed tools like Claude Code would replace the need for software development, making the sector look like it could soon become irrelevant while chip stocks surged. That fear has faded over the past month or two, according to Dierking.
Attention has instead turned to whether AI development is moving too fast for security protocols to keep pace. Several prominent AI company executives have said the pace of development should slow, and Dierking argues a slowdown in AI infrastructure building could turn software firms into leaders rather than laggards.
Cybersecurity names are riding the same wave
Cybersecurity stocks such as CrowdStrike, Cloudflare, and ZScaler have also produced large gains in recent months as investors bet companies will need to spend more to secure their products. Dierking ties that move to the same underlying shift: markets are paying less attention to how much capital goes into AI development and more to who benefits from the infrastructure already built.
Software and cybersecurity stocks have now outperformed the broader market for nearly three months, which Dierking says rules out a short-term bounce. AI trade leadership has already rotated from mega-cap hyperscalers to semiconductors to memory stocks, and he expects software developers could be next in line.
Source: The Motley Fool
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