For Wide Moat Tech Exposure, This Software ETF Could Be Super

As is the case with semiconductors, software is at the epicenter of technological disruption and evolution. That means that as disruptive technologies — including artificial intelligence (AI), cybersecurity, and many more — evolve, so do related investment opportunities.

Some of those opportunities can be seized with ETFs such as the Invesco AI and Next Gen Software ETF (IGPT). The fund, which follows the STOXX World AC NexGen Software Development Index, isn’t a dedicated software fund. But it offers significant inroads to that industry. It does so by way of myriad stocks with the wide moat designation.

In fact, IGPT and the software space at large are fertile territories for wide moat names. That’s because switching costs — an advantage possessed by many software firms — is one of the pillars of defining a wide moat stock.

Investigate Software ETF IGPT for Wide Moat Stocks

Another perk offered by IGPT is underappreciated inflation defense. That’s because software companies regularly raise prices, often in excess of inflation, as new features and services are added.

“Software industry revenue growth is derived from existing clients in the form of additional seats and new modules and from new vendors and new business formation,” according to Morningstar. “Pricing tends to be lumpy, as software vendors may raise prices by 10% once every three years rather than annually by 2% to 3%. The year 2023 was a busy one for price hikes, as vendors pulled that lever well above normal historical levels.”

Getting back to IGPT’s wide moat offerings, Adobe (ADBE), Autodesk (ADSK) and Dassault Systemes are among the ETF’s holdings that appear on Morningstar’s list of wide moat software stocks. Adobe is IGPT’s fifth-largest holding, commanding 6.16% of the ETF’s roster.

Sticky Customer Bases

All three of the IGPT member firms and many more are examples of software companies with the switching cost advantage and, as a result, sticky customer bases. Those are factors that can support long-term share price appreciation.

“However, strong customer retention for moaty firms creates an annuity-like revenue stream that pays for these costs over time. Customer acquisition costs may be high in year one. But when a customer sticks around for 10 or more years, the lifetime value of this customer can be very high. [That’s] often greater than 3 times the acquisition cost,” added Morningstar.

Investors looking for another longer-ranging catalyst for IGPT need not look much further than artificial intelligence (AI). The ETF’s largest holding is Nvidia (NVDA) and some of its software components have AI leverage, too.

“We believe database-related solutions are growing because of the need to have data organized and prepared in order to apply generative AI. Customer experience grows because it helps users generate new sales,” concluded Morningstar.

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