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The S&P 500 Software Index is down 30%, and it increasingly looks to be on the verge of bottoming out and recovering. The Invesco Nasdaq Internet ETF (NASDAQ:PNQI) might be the perfect buy in this environment, as these stocks are finding their footing and some have already started to make substantial ground towards a full recovery.
Most of the stocks in this sector weren’t sold off due to fundamental reasons, but simply due to fear about AI and the possible impact it will have on software. They are now deeply undervalued relative to their growth rates, and their earnings have caught up and then some.
Buying a software ETF in this environment will give you exposure to a wide range of holdings that are poised to bounce back in earnest.
| Date | Software Sector PE Ratio |
|---|---|
| 2026-04-20 | 21.98 |
| 2025-12-05 | 27.73 |
| 2025-09-05 | 29.95 |
| 2025-05-30 | 32.02 |
| 2025-02-28 | 29.24 |
| 2024-11-29 | 33.96 |
| 2024-08-30 | 33.46 |
| 2024-05-31 | 31.58 |
| 2024-03-01 | 38.30 |
It’s perhaps the best buy-the-dip opportunity you’ll get this year.
Why I like PNQI
PNQI tracks the Nasdaq CTA Internet Index and invests in companies whose bread and butter is the internet. And as you’d guess, most of these are software stocks in one way or another, but PNQI’s composition is quite interesting.
The top holding is Amazon (NASDAQ:AMZN | AMZN Price Prediction)followed by Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). The top 5 stocks are basically your classic Big Tech hyperscaler holdings, followed by dozens of software stocks that have taken a hit from AI. Thus, whether or not AI wins, you do get to eke out some gains, or at least soften the blow.
We’ve seen exactly this play out over the past 6 months. Competing software stocks like the iShares Expanded Tech-Software Sector ETF (BATS:IGV) sold off over 31% in the past six months, whereas PNQI fell by half that amount. If we look at the one-year performance, IGV is down 10.6% in the past year, while PNQI is up 9.7% in the past year. Your upside participation is similar, if not superior to that of IGV, while getting you less downside risk from AI.
It’s the best of both worlds in this environment.
PNQI isn’t foolproof, and you can still miss out
PNQI is different since it does not invest in pure tech stocks and applies that “internet” label very liberally. IGV is 90%-plus tech, and PNQI is only 30% tech. This is a good thing today, and it will likely be a good thing going forward. But again, there will be instances where the composition will work against this ETF.
Those who bought this ETF during the post-pandemic AI bubble learned it the hard way when PNQI fell in the ensuing selloff. We are not in that environment, and I don’t expect a sharp selloff from here, but that’s something to keep in mind just in case you don’t like e-commerce or fintech.
I believe e-commerce is a plus, since many of these are deeply discounted stocks. The market’s hopes may have been dashed for several significant rate cuts this year, but more rate cuts are still expected in the coming years, as they’re still high. Speaking of high, PNQI’s expense ratio is 0.60%, or $60 per $10,000. It’s a little pricey, but I do think you’re getting your money’s worth.
Why I’d buy PNQI right now over other software ETFs
PNQI doesn’t have many “pure AI” holdings in its portfolio. The hyperscalers themselves have advertising or e-commerce businesses and remain highly profitable. On the other hand, an ETF like IGV has Palantir (NASDAQ:PLTR) as its third-largest holding.
Will we see a second leg up where investors push PLTR stock to over $500? Probably not. It’ll probably tread water, and so will most other software AI stocks that are still overvalued.
PNQI is far less risky, and the average price-to-earnings ratio of its holdings is below 25x.
Better yet, you get a little international exposure on the side. Foreign stocks held by PNQI are in the low to high teens, and these have not only softened the software blow but have also added to its gains during rallies. International stocks are expected to continue outperforming their U.S. counterparts as the dollar normalizes and countries worldwide continue cutting interest rates. This is mainly why I’m choosing PNQI, even above the First Trust Dow Jones Internet Index Fund (NYSEARCA:FDN).
A software and a hyperscaler rebound can push PNQI up by over 20% this year. Earnings and revenues are still rising in this sector, so PNQI could end up rallying 30-40% in the next 12 months.
