A Scintillating Software ETF

Investors looking for a hot segment of the technology sector this year may want to evaluate software stocks and the related exchange traded funds. Just look at the SPDR S&P Software & Services ETF (NYSEArca: XSW), which is up more than 24% year-to-date.

XSW tracks the S&P Software & Services Select Industry Index and “seeks to provide exposure to the software and services segment of the S&P TMI, which comprises the following sub-industries: Application Software, Data Processing & Outsourced Services, Home Entertainment Software, IT Consulting & Other Services, and Systems Software,” according to the issuer.

XSW, which has $112.35 million in assets under management, holds 127 stocks, including large-, mid- and small-cap fare.

“The technology sector is one area where we continue to find relative merit. While a more intrusive regulatory environment could cause bumps along the road, technology should continue to drive growth and innovation,” said State Street Global Advisors (SSgA) in a recent note. “It should also benefit as the global economy recovers. Technology shares have continued to perform well, and we believe they look relatively solid across our value, momentum and sentiment factors.”

Sold On Software

XSW’s holdings span five segments of the software universe with four of those groups combining for about 97% of the fund’s weight. The largest industry exposures in XSW are application software, data processing and outsourced services, systems and information technology consulting and services.

Surging demand for enterprise software as well as cloud and Internet software applications are among the important fundamental factors expected to buoy the software industry in the years ahead.

“But as the technology sector matures, it is bifurcating more sharply into winners and losers, increasing the potential for value traps,” according to SSgA. “Given this, investors may want to tilt toward slices of the tech sector with high growth potential, such as the software and services industry. Thanks to strong demand for enterprise software, global corporate spending on software and services is projected to increase by 6.2% in 2018, the highest annual growth rate forecasted since 2007. In addition, the software and services industry is expected to continue posting double-digit growth this year and surpass the broader market in 2019.

For more information on the tech sector, visit our technology category.

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.