By Jacob Sonenshine
Chip stocks have been crushing software, but investors have a way to bet on both.
The iShares Semiconductor Exchange-Traded Fund came into Tuesday up 77% this year, versus the iShares Expanded Tech-Software Sector ETF's 14% loss. For the second quarter coming into Tuesday, the chip fund was beating the software ETF by 48.8 percentage points. Chips dropped Tuesday and software inched higher, but the larger performance trends remain in place.
The divergence is happening partly because some software companies are under competitive threat from OpenAI and Anthropic, and the large ones are spending tens of billions of dollars on data center chips to build their AI capabilities. On the flip side, the chip makers are enjoying a demand surge.
That presents a dilemma for investors. They can buy the beaten-down software industry or succumb to the fact that chips just won't stop surging.
The case for buying software starts with mean reversion. That argument says software stocks can rebound at the chips stocks' expense, as the worst fears about long-term software earnings are priced into the group, and all of the future chip profits are already reflected in their shares.
Supporting that: Microsoft and Oracle are proving they're part of the backbone of OpenAI and Anthropic, as they provide those AI pioneers with compute capacity. Plus, at some point, they'll slow down the rate of their capital investments, and the growth outlooks for semiconductors will dim.
The idea that mean reversion is in the cards has a touch of historical precedent. Before 2026, the record for quarterly outperformance of chips versus software was in the first quarter of 2021, when the chip fund beat the software fund by 33 points, according to Dow Jones market data. In the three months and nine months after that, software outperformed by greater than three percentage points. In the following 12 months, software outpaced chips by 0.2 points.
But it wasn't overwhelming mean reversion, and some investors may not want to bet the farm on software. The solution is sitting right in front of everyone: just buy the widely held and frequently talked about Invesco QQQ Trust, Series 1.
The ETF tracks the Nasdaq 100, a barometer for Big Tech. It owns Microsoft and cybersecurity software providers Palo Alto Networks and CrowdStrike, which are emerging unscathed from the new competition. It also owns chip makers Nvidia, Advanced Micro Devices, Broadcom, Micron Technology, among others.
The point is that it offers a "barbell" strategy, meaning it gives investors exposure to both software and chips. Maybe both industries can run higher at the same time. Or a software mean reversion can take the ETF higher, while chips lag, and vice versa. This year, with chips gain as software's pain, the "QQQ" as it's commonly known, is up 15%, better than the S&P 500's near 8% rise.
Overall, the QQQ looks attractively valued. At roughly 26 times aggregate expected next 12 months earnings from analysts, the multiple is only about 1 times expected annual growth of those earnings for the coming two years, according to Citi equity strategist Scott Chronert.
That "PEG ratio" or price/earnings-to-earnings growth, is close to a 20-year low, with the high coming in at over 2.5. The currently low PEG ratios means investors are paying only 1 P/E multiple point for every percentage point of expected earnings growth, so multiples are inexpensive enough for higher earnings to push the index upward.
What does that earnings per share growth look like? Analysts forecast 28% annual growth over the coming two years, driven by 13% sales growth, which is enough to nudge profit margins higher. Stock repurchases from the largest companies would handle the rest of the EPS growth.
So maybe don't make a bet on either side of the tech trade. Just own the whole sector.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 12, 2026 12:27 ET (16:27 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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