As Nvidia Dominates AI, This Software ETF Positions for the Next Wave of Growth

Key Points

Nvidia (NASDAQ: NVDA) has undeniably been one of the primary beneficiaries of the artificial intelligence (AI) boom. However, the next phase of the AI trade may be driven by an entirely different sector.

The exchange-traded fund (ETF) I am monitoring to capitalize on this shift is the iShares Expanded Tech-Software Sector ETF (NYSEMKT: IGV). While intense AI development previously hindered the long-term investment thesis for software, a potential deceleration in AI advancement could conversely propel software shares higher.

For the majority of 2026, semiconductors have been substantial winners, while software stocks have lagged. Through the end of June, this fund declined by more than 14%, even as the VanEck Semiconductor ETF (NASDAQ: SMH) surged over 80%.

In the second half of 2026, however, this trend began to reverse. During the current quarter, the iShares Expanded Tech-Software ETF has risen 15%, while the VanEck Semiconductor ETF has fallen 14%.

Several catalysts are driving this shift, and they appear poised to persist.

Image source: Getty Images.

Software stands to gain from an AI development slowdown

Among the earliest beneficiaries of the AI trade were chip manufacturers and companies providing the essential components for artificial intelligence capabilities.

Conversely, the software sector lagged significantly. Many believed that AI and tools like Claude Code would eliminate the need for software development. While stocks tangentially tied to AI growth delivered substantial returns, investors feared the software sector could soon become obsolete.

That sentiment has shifted over the past month or two.

The prevailing AI narrative now questions whether development is occurring too rapidly and if security protocols can keep pace. Several prominent AI executives have advocated for slowing the development rate. If rapid AI infrastructure construction previously hindered software stocks, it logically follows that a slowdown in that build-out could transform them into market leaders.

Cybersecurity has also garnered significant attention due to these same concerns. Companies such as CrowdStrike (NASDAQ: CRWD), Cloudflare (NYSE: NET), and ZScaler (NASDAQ: ZS) have generated impressive returns recently, driven by the expectation that enterprises will increase spending on product security.

All of these factors create a compelling bullish case for the software sector.

Why IGV represents the next phase of the AI trade

A prevailing theme over the past year is that markets are increasingly skeptical of AI hype, favoring companies that deliver tangible results.

There is less focus on the capital committed to AI development and more emphasis on identifying which businesses will profit from the infrastructure already constructed. The very factors that made software unappealing previously are the ones making it attractive now.

It has been nearly three months since software and cybersecurity stocks have outperformed the broader market. Consequently, this is not merely a short-term bounce. AI trade leadership has transitioned from mega-cap hyperscalers to semiconductors, and then to memory stocks. The next phase of this leadership cycle could belong to software developers.

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