U.S. Markets closed

Software Industry a Primary Driver of Tech’s Upside

This article was originally published on ETFTrends.com.

One of the primary drivers of the technology sector's upside this year is the software industry. Consider the SPDR S&P Software & Services ETF (XSW) , which is up more than 23% year-to-date and residing near all-time highs.

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.

Investors are beginning to look at tech stocks as a safety play, betting that the double-digit gains will continue on rising earnings growth, despite concerns over global trade conditions. According to BofA Merrill Lynch data going back to 1995, tech stocks were among the best performers in the 30-days after a trade action is announced, whereas the broader stock market typically takes a hit following trade concerns.

“With growth becoming challenging, investors may want to tilt toward sectors and industries with high growth potential and consistently beating earnings expectations,” said State Street Global Advisors (SSgA). “In later stages of the business cycle, higher wage pressure and increasing capacity utilization has created incentive for companies to automate with technology and increase productivity with software systems.”

Favorable Software Forecasts

Strong demand for various corporate software platforms is fueling XSW's ascent this year. The ETF allocates about 36% of its weight to application software providers and 27.5% to data processing firms.

“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,” according to SSgA.

Increased corporate dependency on Internet solutions and cloud-based services are also catalysts that bolster the long-term thesis for XSW.

“As the Internet becomes faster and more reliable, businesses and consumers continue to move toward cloud-based software solutions, projected to become a $200 billion market by 2021, nearly double the revenue estimated for 2017,” according to SSgA. “This secular trend may aid the evolution of the industry and provide the second leg of industry growth in coming years.”

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