The software sector has experienced significant underperformance, with the iShares Expanded Tech-Software ETF (IGV) declining 30% since September 2025 while the broader technology market has remained relatively flat. This divergence has prompted discussions about whether artificial intelligence poses an existential threat to traditional software-as-a-service (SaaS) companies by enabling organizations to develop custom solutions at lower costs and reducing competitive barriers to entry.
While the threat posed by AI-driven custom development warrants consideration, enterprise software companies possess structural advantages that extend beyond raw code functionality. Established switching costs, integrated data ecosystems, and accumulated customer trust create meaningful barriers that protect many market participants from commoditization. These factors suggest that the impact of AI will not be uniformly negative across the sector, with company-specific attributes determining resilience.
Given the sector's current volatility and AI's uncertain impact trajectory, investors should conduct detailed evaluations of individual software companies rather than applying broad sector-wide judgments. A measured approach incorporating small starter positions paired with disciplined stop-loss orders may allow investors to navigate the sector's transition while managing downside risk exposure.