As with semiconductors, software is at the epicenter of technological disruption and evolution. This means that as disruptive technologies — including artificial intelligence (AI), cybersecurity and many others — evolve, so do the associated investment opportunities.
Some of these opportunities can be exploited with ETFs such as Invesco AI and Software Next Generation ETF (IGPT). The fund, which tracks the STOXX World AC NexGen Software Development Index, is not a dedicated software fund. But it offers significant inroads into that industry. It does this through countless sections marked with a wide ditch.
In fact, IGPT and the software space as a whole are fertile fields for big names. That’s because switching costs — an advantage many software companies possess — are one of the defining pillars of broad stock.
Explore Software ETF IGPT for Wide Moat Stocks
Another benefit offered by IGPT is protection against understated inflation. That’s because software companies regularly raise prices, often higher than inflation, as new features and services are added.
“Software industry revenue growth comes from existing customers in the form of additional seats and new modules, and from new vendors and new business formations,” according to Morningstar. “Prices are usually flat, since software vendors can raise prices by 10% once every three years, rather than by 2% to 3% annually. The year 2023 has been bullish as suppliers have pulled that leverage well above normal historical levels.”
Returning to IGPT’s broad offering, Adobe ( ADBE ), Autodesk ( ADSK ) and Dassault Systemes are among the ETF’s holdings that appear on Morningstar’s list of broad software stocks. Adobe is IGPT’s fifth largest holding, accounting for 6.16% of the ETF’s list.
Sticky customer bases
All three IGPT member companies and many others are examples of software companies with switching cost advantages and, as a result, a fixed customer base. These are factors that can support long-term share price appreciation.
“However, strong customer retention for moaty companies creates an annuity-like revenue stream that pays these costs over time. Customer acquisition costs can be high in the first year. But when a customer is retained for 10 years or more, the lifetime value of that customer can be very high. [That’s] often more than 3 times the cost of the acquisition,” Morningstar added.
Investors looking for another longer-term catalyst for IGPT need look no further than artificial intelligence (AI). The ETF’s largest holding is Nvidia (NVDA), and some of its software components are also AI-influenced.
“We believe that database-related solutions are growing due to the need to organize and prepare data in order to apply generative artificial intelligence. Customer experience grows as it helps customers generate new sales,” Morningstar concluded.
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The views and opinions expressed herein are those of the authors and do not necessarily reflect those of Nasdaq, Inc.