Buying Beaten-Up Software Stocks

Last week, this very bearish person on precious metals discussed how gold could bounce. It did, officially, with SPDR Gold Shares (GLD) increasing .3%. iShares Silver Trust (SLV) rose by 3.1%, and VanEck Gold Miners ETF (GDX) rose 7.1%. In my personal account, I got long GDXD again after exiting the position completely.

A Look at the Market

Stocks and bonds extended their declines this past week and are down year-to-date. The S&P 500 closed at 6368.85, which is down by 7.0% year-to-date and down 9.1% from the all-time high set during trading on January 28th. State Street SPDR S&P 500 ETF (SPY) has returned -6.8% with dividends included. The iShares Core US Aggregate Bond ETF (AGG) has dropped in price by 1.3% and has returned -0.7% with the dividends included.

The themes continue, with the largest stocks or stock sectors generally under pressure, as I explained last week. Energy is leading the way, with XLE now up 40.8% on a total-return basis. Technology, the largest sector is down, with XLK returning -9.7%. Consumer Discretionary is the second-weakest sector, with XLY returning -11.3%. Financials are now down the most, with XLF returning -12.3%.

The Technology sector is interesting because returns within it are very mixed. One area that has been quite strong is semiconductors, with two ETFs that I follow performing quite well. iShares Semiconductor ETF (SOXX) has returned 7.5% in 2026, and VanEck Semi ETF (SMH) has returned 3.9%. Software has been very weak, with the State Street SPDR S&P Software & Services ETF (XSW) returning a stunning -26.1%.

In my personal account, I have been betting against this rally in semiconductors, but I have a very small position currently. I want to talk about XSW today, as I do own that in my personal account. This bear kind of likes software stocks!

I wrote a piece at Seeking Alpha on XSW about a month ago, explaining why I liked the beaten-up tech ETF. It has declined by 10% since the publication, which is a bit worse than the S&P 500.

XSW has been hit by fears of artificial intelligence negatively impacting these companies, which it may. This ETF, run by a huge ETF company, is the smallest one on my watchlist of 84 ETFs, currently at $361 million in assets. The expense ratio seems fair to me at 0.35%, which is low compared to many ETFs and mutual funds but high compared to the very lowest fees charged for the very largest ETFs that are close to zero.

State Street maintains a page for XSW on its website for those that want to learn more about it. The index (and the ETF) includes lots of companies, and I really like that they are modified equal weighted as opposed to market-cap weighted. The 138 stocks have a weighted average market cap of $41.8 billion as of 3/26, according to State Street, and my Koyfin system says that they range in market cap from $129 million to $2.65 trillion. The median market cap is $3.9 billion, so there are lots of tiny companies. There are 10 companies with more than $100 billion market cap.

While I often show the top 10 holdings of an ETF when I write about it, that would be wasting the time of readers of this article, as the top 10 represent only 9% of the ETF. Anyone that wants to know what they are can visit the website linked above.

What I do want to show is the top 20 by market-cap (not by their weight in the ETF!). Each of these names has a market cap in excess of $37 billion:

Koyfin

All of these stocks are down, with the very best one, Electronic Arts (EA), down just 1.4%. One of the reasons I found this ETF was that I noticed the weakness in IBM (IBM), Microsoft (MSFT) and Oracle (ORCL). The forward PE ratios on some seem quite low, and the distance from the 52-week highs is quite large. According to Koyfin, the median PE is 18X, while the average is 26.4X.

While I certainly know some of these companies but don't follow them closely, the three highlighted ones are on my own personal watchlist. I own Adobe (ADBE), which I just bought yesterday. I have written about why I like ishares Bitcoin Trust ETF (IBIT), and as one who is trying to understand the Bitcoin market, I have learned a lot about Strategy, Inc. (MSTR). I am quite negative about that company, but it will not impact this ETF in a big way even if it goes to zero.

Here is the six-month chart of the ETF:

The ETF has a six-month high that is just under the all-time high of $206 from late 2024, and, at $138.25, XSW is 32.6% below the 52-week high set in late October. There have been two gaps left in trading this year, but they are way above the current price. I see potential resistance at several levels above ranging from 146 to 160.

Looking at XSW over the last 10 years and comparing it to SOXX and QQQ as well as SPY, it is losing:

Over the past three years, XSW has returned a lot less than these other ETFs too, with a 19.1% return that is far below second-place SPY at 66.2%. While XSW could keep falling, it seems overdone to this bear!

ETF Model Portfolio Update

This ETF model portfolio, which is measured against 60% SPY and 40% AGG, is up considerably relative to its benchmark. This week, I did several trades, all of which are published on my Seeking Alpha blog.

Going into the week, my equity exposure totaled 55.2%, spread out across six ETFs. Here is what I did this week:

• Monday - I exited Vanguard Small-Cap Value Index Fund ETF (VBR) and added to Vanguard Short-Term Inflation-Protected Securities Index ETF (VTIP) and to XSW.

• Tuesday - I reduced my favorite ETF, ProShares Russell 2000 Dividend Growers ETF (SMDV) added to XSW at a much lower price than it had been the day before.

• Wednesday - I reduced IBIT and XSW and added to VTIP.

• Thursday - I trimmed Invesco High Yield Equity Dividend ETF (PEY) and added IBIT and XSW.

• Friday - I exited Vanguard Short-Term Treasury Index (VGSH) and added to IBIT, SMDV and XSW, and I sold the rest of PEY to add to Invesco S&P 500 Equal Weight ETF (RSP).

Here is the current model portfolio, which now has 54.3% equity exposure in four ETFs and fixed income exposure in two ETFs that totals 36.4%. There is also 9.2% invested in an a 7th ETF that is considered "Other":

How Can I Help You?

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