Software ETF Lost 24% in Q1: 3 Reversal Catalysts
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- iShares Expanded Tech-Software Sector ETF (IGV) lost 24.3% in Q1 2026, marking its worst quarterly underperformance versus the S&P 500 since 2002, according to Dow Jones Market Data.
- Evercore ISI analyst Kirk Materne identified three potential catalysts for the sector: adoption of usage-based pricing to demonstrate AI monetization, closing the performance gap with semiconductor stocks, and cost-cutting to preserve operating margins while investing in AI.
- The VanEck Semiconductor ETF (SMH) outperformed IGV by 30.7 percentage points in Q1 — the largest quarterly outperformance on record between the two sectors, per Dow Jones Market Data.
- Morningstar analyst Luke Yang told MarketWatch that layoffs are one lever software companies are pulling to cut costs, but that a turnaround is hard to predict without evidence that enterprises are purchasing AI-based solutions "at scale."
- Materne sees the most upside in Microsoft, Salesforce, Snowflake, Intuit, and Samsara, saying investors should "stay selective and have some patience" rather than rush back into the sector.
- The disconnect is stark: chip stocks have been the AI trade's primary beneficiary, leaving software investors questioning why hold the sector if semis are outperforming on both an absolute and relative basis, as Materne put it.
Why it matters: The IGV's 24.3% Q1 loss was the worst quarter vs. the S&P 500 since 2002, and the 30.7-point outperformance of SMH over IGV set a new record — meaning software is now the laggard of the AI trade. Investors weighing a re-entry need Materne's three signals: usage-based AI revenue, the semis gap closing, and margin discipline. Without them, the analyst's own advice is patience over bottom-fishing.
