Software Stocks Just Had Their Worst Quarter Since 2008. What Should Investors Do Next?

Software stocks just had their worst quarter since 2008. Yes, you read that right. The selloff triggered by the launch of Claude Sonnet 4.6 and Claude Cowork plugins freaked everyone out and, as a consequence, stocks and exchange-traded funds (ETFs) related to the software industry have caused a lot of pain to investors.

Things aren’t slowing down, either. The beginning of the second quarter hasn’t been any good so far. Some of the stocks that brought software ETFs down continue to tank further. The iShares Expanded Tech-Software Sector ETF (IGV) was no exception and its holdings aren’t doing well in April.

Here’s how the fund's top 10 holdings stack up so far this month:

This begs the question: Is it still the right time to start accumulating the IGV ETF? Mizuho Securities recently used the Jevons Paradox to explain how memory stocks will become more relevant after Alphabet's (GOOGL) TurboQuant revelations. If investors want to bet on IGV, they’ll need a similar bull thesis, implying that with automated software techniques, existing software companies will become even more efficient, thus increasing their value in the long run.

About IGV ETF

The iShares Expanded Tech-Software Sector ETF is managed by BlackRock (BLK) and offers exposure to North American software and media companies. It is a specialized fund heavily tilted toward the technology sector, tracking the S&P North American Expanded Technology Software Index.

The IGV ETF is down 30% so far this year compared to the S&P 500 Index’s ($SPX) loss of less than 1%. While the S&P 500 has posted a spectacular 5% recovery since the beginning of the month, the IGV ETF has continued its downtrend, giving no respite to those backing software at this stage.

Interestingly, despite such a poor performance, the ETF still trades at a trailing price-to-earnings (P/E) ratio of 36.35 times. Meanwhile, the iShares Expanded Tech Sector ETF (IGM) and the iShares U.S. Technology ETF (IYW) trade at multiples of 35.52 times and 35.72 times, respectively. IGV ETF still trades at a higher valuation, but the difference is now minimal. Investors may take this as a point of support and it might therefore be worthwhile for investors to initiate a position at this level. However, with a negligible dividend, there is no income support. Investors would just be betting on a recovery in the sector, which is a high-risk play right now even if the valuation looks reasonable.

It is also worth adding here that, according to Barchart’s technical indicators, the ETF is a sell. The table below shows how IGV (left) is a 100% sell and almost in oversold territory while the other two ETFs — IGM (middle) and IYW (right) — enjoy more comfortable technical positions. Even from a trader’s perspective, the risk of taking a contrarian bet on the software sector at this stage is huge.

What Are Analysts Saying About IGV ETF?

It is still unclear how exactly the IGV ETF’s constituents will move going forward. Not all software stocks will survive, and not all of them will be able to innovate enough or diversify to stay relevant. Investors must therefore take analyst estimates with a grain of salt and expect volatility.

Currently, many analysts project more than 50% potential upside based on the price targets of individual stocks within the fund. However, since the ETF is heavily concentrated in a few big names and many analysts are yet to determine the exact impact on many of the stocks, price targets may not be as relevant in the current environment.

With all that said, backing the software sector at this point may not be worth it. Yes, the stocks are beaten down and valuations are shrinking, but the recovery only comes if these companies are able to beat AI disruption fears. It is extremely hard to predict which companies will survive and the probability of those companies being in the IGV ETF cannot be calculated. Investors are likely better off looking for opportunities elsewhere.