The sell-off in U.S. software stocks is beginning to ripple through software and technology ETFs, fueling concerns that the sector's core business model may be under its first real stress test in the AI age.
The iShares Expanded Tech-Software Sector ETF (BATS:IGV), often used as a proxy for large-cap U.S. software, took the hardest hit on Thursday, declining by about 5% ― which is one of the largest one-day moves the fund has experienced since the start of the pandemic. Given its heavy exposure to Microsoft Corp (NASDAQ:MSFT), Oracle Corp (NASDAQ:ORCL) and other enterprise software giants, IGV is particularly sensitive to shifts in cloud spending expectations and AI monetization narratives.
However, it was by no means alone. The Technology Select Sector SPDR ETF (NYSE:XLK), which blends hardware, semiconductors and software, fell roughly 2%, reflecting how megacap software names can still drive broader tech performance. Microsoft remains one of XLK's largest holdings, amplifying the impact of its sharp decline.
The SPDR S&P Software & Services ETF (NYSE:XSW) declined by almost 4%, highlighting pressure on mid- and smaller-cap software companies that tend to have narrower product lines and less pricing power. Meanwhile, the Amplify Cybersecurity ETF (NYSE:HACK) and the AOT Software Platform ETF (NYSE:AOTS) both declined by 3% and 1.2% respectively. HACK’s decline brought to the fore how even defensive software niches are being pulled into the broader reassessment. AOTS’ dip reflected investor caution toward platform-style software models that depend on expanding ecosystems and sustained user growth, precisely the areas where AI-driven efficiency gains may begin to cap demand.
The fact that the sell-off was so broad indicates that investors are taking a hard look at software as an industry in general, rather than simply rotating from one trade to another.
Microsoft's Slide Reignites AI Monetization Doubts
The immediate catalyst was Microsoft's 10% plunge on Thursday, its worst session since the 2020 lockdown shock. Although the company exceeded earnings expectations, investors focused on slowing Azure cloud growth and cautious forward guidance, reviving doubts about how quickly AI enthusiasm can translate into durable revenue.
That disappointment spilled into software-heavy ETFs already under pressure. High-profile names such as Palantir Technologies Inc (NASDAQ:PLTR), Oracle and AppLovin Corp (NASDAQ:APP) are down nearly 20% for the month, reinforcing concerns that the recent pullback may be more than a short-term reset.
Are Subscription Models Losing Their Premium?
For ETF investors, the key question is whether the selloff reflects technical weakness, or a deeper shift in fundamentals.
Analysts argue markets are beginning to challenge a long-standing assumption that subscription-based software deserves premium valuations due to scalability and low marginal costs. Some strategists are also taking a bearish stance. They argue AI could suppress software demand altogether by removing friction and reducing the need for layered tools. If software can be generated, modified and orchestrated by AI agents at near-zero cost, the traditional buy-side market for software may shrink rather than evolve.
Effect On ETFs
For ETFs, that would imply a longer-term re-rating of the sector, not a quick rebound.
The simultaneous decline across IGV, XLK, XSW, HACK and AOTS suggests the market may be pricing in something more profound than an earnings hiccup. Software ETFs, once seen as a clean way to access scalable growth, are now becoming a testing ground for how AI reshapes demand itself.
In that sense, Thursday's selloff looks less like panic, and more like a referendum on whether software's golden business model still holds in a world where AI keeps rewriting the rules.
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