The artificial intelligence trade may be entering its next phase—and ETF investors are taking notice.
After dominating markets for much of 2026, semiconductor stocks stumbled on Friday while software companies staged a sharp rally, lifting software-focused exchange-traded funds well ahead of their chip-focused counterparts. The move suggests investors may be broadening their AI exposure beyond hardware makers to companies that are monetizing AI through enterprise software and applications.
The iShares Expanded Tech-Software Sector ETF (IGV) and the State Street SPDR S&P Software & Services ETF (XSW) rose almost 4% on Friday, outperforming the VanEck Semiconductor ETF (SMH), which went the opposite direction. The nearly six-percentage-point gap marked one of the strongest relative performances for software versus semiconductors this year, per Dow Jones Market Data, as investors rotated out of several high-flying AI chip stocks.
Software ETFs Take Center Stage
IGV's gains were fueled by a broad rally across enterprise software names.
Among the fund's biggest winners were Guidewire Software Inc (GWRE), BlackBerry Ltd (BB), Intapp Inc (INTA), ServiceNow Inc (NOW), and Asana Inc (ASAN), each rising between 6% and 10% during Friday's session.
Along with them, Workday Inc (WDAY) advanced 7%, AppLovin Corp (APP) gained 8%, and Palantir Technologies Inc (PLTR) added 4.3%, snapping a seven-session losing streak.
The strong performance comes after software stocks spent much of the AI boom trailing semiconductor companies. Investors had largely favored chipmakers, betting they would be the primary beneficiaries of surging demand for AI infrastructure, while concerns persisted that generative AI could disrupt parts of the software industry.
Friday's move suggests investors might be beginning to recognize that software companies may also stand to benefit as AI adoption expands across enterprises.
Semiconductor ETFs Pause After a Historic Run
Meanwhile, semiconductor ETFs came under pressure as investors took profits following an extended rally.
SMH was down 4%, weighed down by sharp declines in Microchip Technology Inc (MCHP), Analog Devices Inc (ADI), Monolithic Power Systems Inc (MPWR), Teradyne Inc (TER), and ON Semiconductor Corp (ON).
ON Semiconductor was the fund's biggest drag, plunging more than 24% after announcing an all-stock acquisition of Synaptics valued at approximately $7 billion in enterprise value.
The broader semiconductor sector also weakened, with the PHLX Semiconductor Index (SOX) falling close to 5%.
The pullback follows a stellar year for semiconductor stocks, which have been among the market's strongest performers, driven by relentless demand for AI accelerators, high-bandwidth memory, advanced networking chips, and data center infrastructure. Many semiconductor ETFs have posted outsized gains in 2026 as investors piled into companies viewed as the backbone of the AI revolution.
What It Means for ETF Investors
Friday's divergence doesn't necessarily signal the end of the semiconductor rally. Instead, it may indicate that investors are expanding their AI exposure beyond chip manufacturers to companies positioned to generate recurring revenue from AI-powered software and enterprise applications.
For ETF investors, this broadens the opportunity set across the technology sector.
Investors seeking exposure to AI software may look to funds such as IGV, which has significant allocations to enterprise software leaders, or the First Trust Dow Jones Internet Index Fund (FDN), whose holdings include AI-enabled internet and software platforms. Broader technology ETFs such as the Technology Select Sector SPDR Fund (XLK) also provide exposure to both software and semiconductor companies, offering a more balanced approach to the AI ecosystem.
On the semiconductor side, SMH and the iShares Semiconductor ETF (SOXX) remain among the primary vehicles for investors seeking exposure to AI infrastructure, despite Friday's selloff.
Whether the latest move proves to be a short-lived bout of profit-taking or the beginning of a broader rotation remains to be seen. But for the first time in months, software ETFs, not semiconductor funds, are leading the AI trade.
