AI ETFs help 'capture' more select groups of software stocks

00:03 Speaker A

Software stocks are making a comeback after taking a beating for the year so far. The uh sector’s ETF IGV has been has had its best run since basically April. The fund’s portfolio includes heavyweights such as Microsoft, Palantir, and Oracle. Let’s take a state of the sector look and what this means for software and tech ETFs broadly. Cynthia Murphy, vetifies investment strategist joins me for more in this week’s ETF report brought to you by Pimco.

00:41 Speaker A

Oh, it’s great to see you here, Cynthia. So, I’m going to call for the Wi-Fi interactive. I’m going to show a heat map of the software space, what it’s doing today. And you can see there’s a lot of green there, but I want to show you what’s happened over the last three days. This is a catch-up story because we’ve seen semiconductors running for 11 days straight. The Nasdaq semiconductors large cap tech up 11 days straight, but software only came alive a few days ago.

01:04 Speaker A

And you can see in the upper left, that’s Oracle up 24%, Snowflake up 15, a lot of outperformers here. So what do you how are you seeing the ETF space in software right now?

01:15 Speaker B

Yeah, software has been a crazy story this year. I mean, as we started the year, it was all about, you know, the the kind of end of the software run, the concern that AI was going to completely disrupt software companies. Yeah, lots of scares.

01:29 Speaker B

and a lot of a lot of selling pressure there. I think what we’re seeing right now is we’re in that kind of show me the money type of phase and we’re trying to see which software companies are actually going to be able to integrate AI and and move forward and which ones are going to become legacy names that are not going to do well.

01:52 Speaker B

So there’s a lot of looking to earnings, is there any money, are they actually being able to monetize? We’re having we’re hearing conversations about companies like Salesforce, companies like ServiceNow revisiting their monetization models, going from a, you know, subscription per seat basis to maybe custom application basis. And so there is a reinvention in the space. There is a trying to figure out a path forward and they got cheap.

02:08 Speaker A

Yeah, they got really cheap.

02:08 Speaker B

The valuations got reset. And so just yesterday, Andrea Doley I was talking to a value portfolio manager and he said a lot of these tech names now are now landing in his value fund because they just got so cheap. So it’s also an interesting that moment for them because they became kind of an opportunity. Yeah, that’s interesting.

02:22 Speaker A

Yeah, you know, we, I have a lot of names on this software heat map here and not all of them, there’s only one that’s red over the last three days. That’s Cisco. But if we look over the last 11 days, you can see Okta down 11, ServiceNow down 11, 12, Snowflake down 9. I’m just wondering, are there any ETFs besides the broad one, IGV, that might capture a select group that you like, it could be in the cyber security, it could be somewhere else. Any of those you like?

02:51 Speaker B

Yeah, so I mean, as to your, to your point earlier, Jared, the semiconductors continues to do well. So focus folks that are focused on that hardware part of the story continue to do well. Uh, cybersecurity, huge opportunity. I mean, funds like Hack, for example, really capture that space well. You know, AI has been incredible. It’s all about data security now. So, cybersecurity is a huge opportunity right now.

03:19 Speaker B

In software, you’re you’re seeing the kind of just broad tech funds struggle, but the ones that are like more focused on the generative AI applications, things like chat or WT from Wisdom Tree, these are all funds that are capturing a few more select groups on the in the software space. So it really can be a little pick and choosy on the funds as opposed to just a really broad tech approach uh and finding some winners. Yeah.

03:42 Speaker A

Well, I want to cast a really big net here. I want to talk about the S&P 500, the 500 biggest stocks in the US and um we can we can we can basically calculate the S&P 500 on a market cap basis or flow cap and that’s how big they are. So if they’re bigger, their uh their weight counts for more in the index. or you can do an equal weight. And I have the Wi-Fi interactive showing both of the performances here over the last 11 days because we’re in this 11-day rally.

04:12 Speaker A

So the S&P 500 market cap, the one that we usually talk about, that’s up 10%. The equal weight is up a bit less, about half of that. But if I show you a year to date,

04:22 Speaker A

you’re going to see the equal weight only barely dipped negative. Meanwhile, the S&P 500 was down some, it was down almost 10% off of the highs there. And you can see that the equal weight is actually up more here, 4%. So discuss some of the factors of the equal weighting versus the market cap weighting and the concentration issues that that brings up.

04:44 Speaker B

So, equal weighting is all about diversifying that concentration risk. When you look at the S&P 500 today, about 35% of the index is in tech stocks. So when in a year when tech stocks no longer are leading and they’re get taking a beating, the S&P 500 is going to lag an equal weighted because equal weighted gives much more opportunity to all the other names. So when you look at an equal weighted portfolio, and and there’s some interesting funds like RSP, equal weights per stock, EQL, equal weights per sector.

05:15 Speaker B

So think about that for a second. You get 11 sectors equal weighted in a portfolio. 100 you get about 10% to energy, 10% to materials. Yeah.

05:25 Speaker A

I was gonna say energy is one of the smallest one and suddenly it’s a lot bigger.

05:28 Speaker B

Yeah. And so energy and materials are the two best performing sectors in the SB 500 this year, but it only represents three and 2% of the SB 500. What was that ticker one more time, the sector?

05:37 Speaker A

EQL.

05:38 Speaker B

EQL. Okay, I’m going to have to remember that.

05:39 Speaker A

Yeah, so, so, so it just completely shifts the leadership of what’s driving the portfolio. So in years when you get a broadening or a change in market leadership, equal weight tends to step forward.

05:50 Speaker B

Uh, in the last few years when it’s been an all-a tech story, a Meg 7 story, it was been really hard to beat market cap. Yeah.

06:01 Speaker A

All right, we got about a minute left. So let’s talk about the space economy. We got a bunch of ETFs. Some of them new. There’s UFO, there’s ARX, that’s the Ark funds. Uh that’s defense heavy. And then there’s also NASA. We had the sponsor on this on one of our programs recently. I get to interview him. And that is uh that has a SpaceX allocation. So talk to us about some of these exciting new opportunities in space.

06:29 Speaker B

I mean, we’re all fascinated by space. It’s an exciting story. Today is no longer a rocket launch story. It really is a space economy story. It’s really a lot like an infrastructure build story. And a fund like UFO, for example, it’s capturing exactly that. So there’s a lot of satellite communications, navigation services, things that have nothing to do with sending people to the moon and everything to do with our day-to-day lives in ways that we’re bringing in space to to things that we do today.

07:02 Speaker B

So it’s it’s a really fascinating story. It’s an economy that’s growing fast. It’s about the space Foundation estimates at about a $700 billion space economy today globally. and it’s doubled in 10 years. So it’s it’s a lot of growth opportunity there.

07:18 Speaker A

Yeah, we’ll have to see when that next 10X happens there. Cynthia, thank you so much for stopping by. Really appreciate that.