The Next Phase of AI: Analyzing the iShares Expanded Tech-Software Sector ETF (IGV)
When discussing progress made in AI technology so far, a common phrase stated one way or another is, “We’re in the early innings.” Baseball references aside, it is largely thought that the buildup of AI infrastructure is part of the first stage of this new technology. In 2022, ChatGPT showed how useful large language models (LLMs) can be. This sparked big investments over the following years. Four hyperscaler firms will invest over $300 billion in AI infrastructure in 2025.
However, AI infrastructure won’t have a fully revolutionary impact on society in a vacuum. To do this, the world will need revolutionary AI applications, particularly software. Many see this as the next phase of AI. This brings up an interesting fund, the iShares Expanded Tech-Software Sector ETF (NYSE: IGV). It holds many software companies that are developing AI products. So, does this ETF offer a strong way to play the next phase of AI while reducing company-specific risk?
IGV: Holdings Deep Dive and AI Exposure Analysis
Looking at IGV’s holdings reveals it has a large stake in companies deeply involved in using software to further AI. Let’s take a closer look at some key holdings:
- Microsoft (NASDAQ: MSFT): With an 8.7% weight in IGV, Microsoft is a major player in both AI infrastructure and software. Its Azure platform provides a computing infrastructure for AI software.
- Oracle Corporation (NYSE: ORCL): Tied with Microsoft as IGV’s largest holding, Oracle plays a significant role in AI infrastructure and software. Its Autonomous Database product utilizes AI to automate tasks.
- Salesforce Inc (NYSE: CRM) and Palantir Technologies Inc (NASDAQ: PLTR): These companies are high-flying software names within IGV that are heavily focused on AI applications.
Overall, many of the over 100 software companies within IGV are building or have already built software tools focused on AI. However, the level of focus on AI varies significantly from holding to holding.
IGV: Software Focus Has Advantages Over Other Funds
One notable aspect of IGV is its exclusion of robotics-centric firms, unlike other AI-focused funds. This distinction is important due to the differing profitability and risk profiles between robotics and software companies:
- Software companies have high margins, scalability, and recurring revenue, making them more stable investments.
- Robotics firms can struggle with profitability, long development times, and revenue volatility, leading to higher risk.
By focusing on software companies involved in AI, IGV offers a lower risk and lower reward profile compared to funds with a robotics emphasis.
IGV: Providing Diverse AI Software Exposure in Tech, But Sector Risks Remain
IGV presents an intriguing opportunity to capitalize on the next phase of AI. While its diversified holdings help mitigate individual stock risk, it remains exposed to the volatile tech sector. Investors should weigh the advantages and downsides of IGV against other funds or individual stocks before making investment decisions.
Analysis:
The iShares Expanded Tech-Software Sector ETF (IGV) offers investors exposure to software companies at the forefront of AI development, providing a unique opportunity to capitalize on the next phase of AI technology. By investing in IGV, individuals can benefit from the following:
- Access to leading companies like Microsoft and Oracle that are deeply involved in AI infrastructure and software development.
- Exposure to high-flying software firms like Salesforce and Palantir, which are heavily focused on AI applications.
- A lower risk and lower reward profile compared to funds emphasizing robotics, due to the stability of software companies.
However, investors should be aware of the sector risks associated with IGV, as the fund remains exposed to the volatility of the tech industry. Understanding the nuances of IGV’s holdings and comparing them to other investment options is crucial for making informed decisions in the ever-evolving landscape of AI technology and investment opportunities.