Here's a basic rule of ETFs: when one of its biggest holdings takes a dive, the whole fund gets wet. That's exactly what's happening to the iShares Expanded Tech-Software Sector ETF (IGV) right now, as it gets caught in the downdraft from a steep sell-off in Palantir Technologies Inc. (PLTR).

Palantir has lost over 13% in just the last two days. That's bad enough on its own, but for IGV—which counts Palantir as a top holding—it's amplifying the pain. The ETF is down more than 5% in that same span, making it painfully clear that betting on high-growth AI companies through an ETF doesn't magically shield you from their downside risk. Sometimes it just bundles it up neatly.

This is adding to what's already been a brutal year for the fund. According to FactSet data, IGV was down more than 24% in the last quarter alone. That marks its worst quarterly return since the global financial crisis in 2008. Software stocks broadly have fallen out of favor, caught between valuation concerns and a narrative around artificial intelligence that seems to be shifting beneath their feet.

AI Spending Shift Hits Software Sentiment

So what's the shift? It boils down to a growing debate about where the real, lasting value in the AI stack will be. New data from Ramp's AI Index suggests that Anthropic—the AI safety and research company—is seeing accelerated adoption among big businesses and is now capturing a notable chunk of new enterprise AI spending.

The report indicates Anthropic's products have won the majority of new deals in the enterprise segment recently. That's a complete reversal from 2025, when its competitors dominated. This success story is fueling skepticism about companies like Palantir, which often integrate third-party large language models rather than building their own foundational AI systems from the ground up.

The worry is that firms without a proprietary AI stack—those heavily reliant on licensing others' models—could be outcompeted as enterprises look for cheaper, more scalable solutions. This skepticism isn't just theoretical; it's been echoed by investors like Michael Burry, who has expressed a bearish view on Palantir's prospects.

ETF Concentration Risk In Focus

The recent market moves are putting a spotlight on the concentration risk in thematic ETFs like IGV. When a fund's performance is driven significantly by a handful of names like Microsoft and Palantir, a sharp drawdown or a wave of negative sentiment around just one or two of them can ripple through the entire portfolio.

And the pain isn't confined to Palantir. The sell-off has spread to other software heavyweights in the fund. Salesforce Inc. (CRM), Adobe Inc. (ADBE), and ServiceNow Inc. (NOW) have all hit fresh 52-week lows recently. This points to a broader reset in how the market is valuing traditional software companies.

For investors in IGV, the key question now is a strategic one: does the ETF's exposure still capture the most lucrative parts of the AI trade? Or is the center of gravity in AI spending shifting decisively toward the model providers like Anthropic, potentially leaving the established software players in the fund playing a costly game of catch-up? It's the kind of question that keeps portfolio managers up at night and makes ETF tickers move during the day.