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Forget FAANGs, Focus on Software ETFs

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The technology-heavy Nasdaq has been the biggest winner in the bull market and has returned 15.5% year to date. Within this space, the software ETFs have performed exceedingly well throughout the year, with Invesco Dynamic Software ETF (PSJ - Free Report) returning 38% year to date. The other two — SPDR S&P Software & Services ETF (XSW - Free Report) and iShares North American Tech-Software ETF (IGV - Free Report) — have returned 32% and 30%, respectively, year to date. PSJ and XSW reached their 52-week high on Sep 12 (see: all Technology ETFs here).
 

Buy, build, partner models and M&A strategies will aid companies in securing competitive advantages. Per Delloite’s 2018 Technology Industry Trends, the scope for growth are in cloud computing, flexible consumption, cognitive computing, user-friendly tools, APIs, apps and data. The report has also suggested keeping a close eye on cyber security and regulatory environment.

The worldwide spending on IT services is estimated to be $3.7 trillion this year. The software companies are benefiting form Trump’s repatriciation policies. This in turn has led to increased possibilities for strategic acquisition.

Global digital marketing software had a market share of $35.36 billion in 2017 and is projected to witness a CAGR of 16.5% and reach $140.63 billion by 2026 during this forecast period. The factors supporting his estimation are increasing adoption of DMS by small and medium-sized entities, boom in social media and advertising and growing reliance on Saas-based solutions.

Saas companies are expected to see strong top-line growth due to consistency in the recurring revenue percentages, subscription gross margin and a lower churn rate. Around 73% of the organizations are estimating that all their applications will be Saas by 2020.

The growing use of Internet-of-things (IoT) in cars, offices, home and every other imaginable place is a big driver for continued growth. Around 94% of all businesses that implemented IoT have already got their investments back. IoT smart devices have a major role to play in manufacturing, healthcare and businesses. By the year 2025, the global growth for this technology is estimated to be $6.2 trillion. Smart cities, automated transportation, smarter energy management systems are some examples of IoT.

However there is little concern in this space with regard to overvaluation especially for FAANGs. The stupendous bull run seems to have been halted lately as several tech companies faced a sell-off (read: Is There a Bubble in FAANG? Buy These Tech ETFs).

Shares of Facebook are down nearly 0.7% over the past week after COO Sheryl Sandberg’s testimony in front of the Senate. Other constituents that make up FAANG are also down. Apple lost 1.3%, Amazon shed 0.4% and Google was down 0.8% barring Netflix, which gained nearly 5% over the past week (read: Trump's Tariff Threat to Hurt Apple: ETFs in Focus).

Based on the latest performances and market demand for software going forward, these software ETFs could be worth investing. All these ETFs carry a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

IGV

It tracks the S&P North American Technology-Software Index. There are 64 holdings in the basket with Salesforce.com (CRM - Free Report) occupying the top spot with 9.01% weight. AUM is $2.1 billion and expense ratio is 0.47%.

PSJ

It tracks the Dynamic Software Intellidex Index. There are 30 holdings in the basket, with Intuit (INTU - Free Report) occupying the top spot with 5.02% weight. AUM is $281.4 million and expense ratio is 0.63%.

XSW

It tracks the S&P Software & Services Select Industry Index. There are 127 holdings in the basket and Acxiom Corp (ACXM - Free Report) occupies the top spot with 1.1% weight. AUM is $131.6 million and expense ratio is 0.35%.

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