Why Software ETFs Are Suddenly Beating Semiconductors — and How the Top Funds Compare

It's crucial to separate two very different time frames, because they tell opposite stories. On a year-to-date basis, semiconductors still dominate: semiconductor ETFs like SOXX and SMH are up roughly 50% to 70%+, while the flagship software ETF, IGV , spent much of the year underwater, down double digits at points as investors dumped software on fears that AI would disrupt SaaS business models.

But on a month-to-date and recent-trend basis, the leadership has completely reversed. Over the past several weeks, software ETFs have sharply outperformed chip ETFs. In August alone, software crushed semiconductors in what analysts called a record divergence. 58 of 61 major chip stocks fell while the software winners posted enormous monthly gains. If you're looking at the last month rather than the last year, software is winning decisively.

Why Are Software ETFs Beating Semiconductors Right Now?

After a monster first half, chip stocks became expensive with some names trading at extreme forward multiples (Intel at one point traded near 79x forward earnings). Meanwhile, software had been sold off hard earlier in the year on AI-disruption fears, leaving many SaaS names historically cheap. When the growth is comparable but one side is pricey and the other is discounted, money typically rotates toward the discount.

2. The AI Trade Is Broadening From Hardware to Software

The first phase of the AI boom was about building the infrastructure — the chips, the data centers, the memory. That phase overwhelmingly rewarded semiconductors. The market is now shifting to the next question: who actually monetizes AI? Increasingly, the answer points to the application and software layer — the companies embedding AI into enterprise products and charging for it. That thesis flows directly into software ETFs like IGV , SKYY , and WCLD .

Semiconductor indices had become historically top-heavy and crowded, with concentration metrics near record extremes. When a trade gets that crowded, it becomes vulnerable to a sharp unwind, exactly what the August sell-off in chips looked like. Investors took profits in their biggest winners and redeployed into the laggard.

4. Software Fundamentals Reasserted Themselves

The bearish case earlier in 2026 was that AI would gut software companies. Recent results suggested the opposite: many SaaS firms are adding AI-driven revenue rather than losing business to it. As that fear faded, the beaten-down software names re-rated significantly higher. Palantir, Salesforce, ServiceNow, CrowdStrike, and Atlassian all posted double-digit-to-triple-digit monthly gains.