Softer-than-expected U.S. inflation data triggered a notable rotation within technology stocks on Wednesday, with software and mega-cap technology ETFs outperforming semiconductor funds as investors scaled back expectations for another Federal Reserve rate hike.
The iShares Expanded Tech-Software Sector ETF (IGV) gained around 2%, while the iShares Semiconductor ETF (SOXX) slipped 0.2%, before gaining marginally. The broader Nasdaq Composite rose more than 1%, while the S&P 500 gained around 1%.
Why Software Is Responding To The Inflation Data
The Commerce Department reported that August's headline Personal Consumption Expenditures price index increased 3.4% year over year, below economists' 3.7% forecast. Core PCE rose 3% annually. Markets subsequently reduced expectations for an October Fed hike.
That matters for growth-oriented stocks because their valuations depend heavily on expectations for earnings and cash flows further into the future. A less aggressive interest-rate outlook can therefore provide a valuation tailwind, particularly for software companies.
IGV provides concentrated exposure to this segment. The ETF tracks North American software companies along with select interactive media and services firms and had 106 holdings as of Sept. 24, with a 0.38% expense ratio. Its largest positions included Palo Alto Networks, Palantir Technologies Inc, CrowdStrike Holdings Inc, Microsoft Corp and Oracle Corp.
The software trade has also been gaining momentum. IGV rose about 38% in the past six months, as investors shifted attention toward companies translating AI adoption into software revenue and profits.
Why SOXX Lagged
SOXX offers a very different form of technology exposure. The ETF holds 30 semiconductor companies and had a 0.33% expense ratio. Its biggest holdings included Intel Corp, Advanced Micro Devices Inc, Micron Technology Inc, Nvidia Corp and Broadcom Inc, giving investors direct exposure to the AI-chip and semiconductor infrastructure cycle.
Wednesday's divergence suggests that the softer inflation reading did not produce a uniform technology rally. Instead, investors appeared to favor software and mega-cap technology while semiconductor stocks lagged.
That makes the IGV-versus-SOXX performance gap worth watching. If expectations for Fed policy continue to ease, software could remain a key beneficiary, while semiconductor ETFs remain more closely tied to AI infrastructure spending, chip demand and earnings expectations.
