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Software's Artificial Intelligence (AI) Surge Exposed Through XSW's Diverse Portfolio

Uncovering the reasons behind XSW's balanced approach in the software industry driving growth in the present day.

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AI-Driven Software Expansion: Gaining Broad Exposure to the AI-powered Software Surge
AI-Driven Software Expansion: Gaining Broad Exposure to the AI-powered Software Surge

Software's Artificial Intelligence (AI) Surge Exposed Through XSW's Diverse Portfolio

News Article: SPDR S&P Software & Services ETF (XSW) Offers Diversified Growth Opportunities in the AI-driven Software Sector

The SPDR S&P Software & Services ETF (XSW) and the Vanguard Information Technology ETF (VGT) represent different approaches within the technology sector, with XSW offering a modified equal-weighted exposure mainly focused on the software and services sub-industry, while VGT provides broad large-cap exposure across the entire information technology sector.

Sectoral Positioning and Growth Prospects

The fund's sectoral positioning, with 71.50% invested in application software and 18.68% invested in systems software, aligns with the A.I. trend. XSW's strategy of holding software companies across the market cap spectrum provides exposure to emerging AI applications beyond just mega-cap cloud platforms. The software & services sector, tracked by XSW, is positioned to benefit significantly from the rising adoption of AI-enabled applications, with spending on AI-related technology projected to double to $749 billion by 2028.

Performance and Comparison

Performance data for XSW assumes reinvestment of dividends, but specific historical returns are not detailed in the available sources. Over the past year, XSW has shown comparable returns to the broader IT industry fund VGT, with 1Y returns and 10Y returns only 5% below VGT. Despite the concentration on the two main sectors of the fund, the weights to individual companies are low, with the top 3 holdings accounting for only 3.56% of the fund.

The software-as-a-service market is projected to grow at an impressive 19.3% CAGR until 2032, reaching a size of $1.3 trillion. Key holdings of the fund include Palantir Technologies Inc. (PLTR), leading in A.I. analytics, and Unity Software Inc. (U), leading in A.I. content creation.

Risks and Considerations

Liquidity is a potential risk for XSW, given its size and low daily trading volume. Regulation is a significant risk for XSW, given the relationship of private data and A.I. in the software industry. The impact of interest rates on valuations is a risk for XSW, especially if the projected rate cut of late 2025 is delayed. The diversified portfolio of XSW, both in terms of individual companies and market caps, presents a positive outlook for the fund.

In conclusion, the SPDR S&P Software & Services ETF (XSW) may offer higher growth potential from broader AI adoption in software services with diversification benefits, while VGT generally provides stable growth anchored by large established tech companies. XSW is considered a buy opportunity for investors seeking exposure to the software industry, offering a position on innovation with a portfolio spread across large, mid, and small cap companies.

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