Software stocks and the related ETFs, including the SPDR S&P Software & Services ETF (XSW), had some compelling moments last year and while the group is often viewed as richly valued, some investors software names to continue delivering in 2020.
XSW seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Software & Services Select Industry Index, which comprises the following sub-industries: Application Software, Data Processing & Outsourced Services, Home Entertainment Software, IT Consulting & Other Services, and Systems Software.
“The Software & Services industry has historically delivered stronger and more consistent earnings beats than the broader market, as businesses quicken the pace of transitioning to cloud-based software solutions,” said Matthew Bartolini, Head of SPDR Americas Research, State Street Global Advisors, in a recent note.
Examining XSW
Various data points and studies indicate sales across multiple software segments are expected to surge in the coming years.
“Per Gartner’s latest IT spending forecast for 2020, enterprise software spending is expected to grow more than 10% in the coming two years, as larger companies increasingly adopt cloud-based software solutions,” according to State Street. “After experiencing margin declines in 2018, software companies enjoyed rebounds in EBITDA margins in 2019 and may continue to see margin expansion going forward, as the cloud platform brings scale and operational efficiencies to help lower costs.”
With the economic cycle entering its late stages, higher beta companies could start reigning in spending, which is something to watch for with technology names. However, with US/China trade relations on better footing, XSW could soar with those headwinds sidelined.
“Even as US-China trade tensions subsided at the end of 2019, disputes and competition between the two countries over technology will likely be at the forefront of political confrontations in 2020,” notes State Street. “The growth of US software and services companies may be less impacted by such an unstable political environment given they have lower foreign revenue exposure than the broader Technology sector.”
XSW has nearly $241 million in assets under management and charges 0.35% per year or $35 on a $10,000 investment.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.