As interest rates have risen, so have 10-yr treasury yields to the tune of 3.5% and counting on their trend to perhaps 4% or worse if needed in this macro environment.

The valuation story, of course, builds on the cost of capital. For those investors following this space, you'd have noticed 50-70% drawdowns in high-flying names that are now being judged for their profitability rather than their growth. Naturally, both have underperformed the S&P and Nasdaq with WCLD scoring a rather nasty 50% drawdown from late 2021. IGV holds some GARP=oriented names, while WCLD is more high-growth influenced in its composition.

IGV - iShares Expanded Tech-Software ETF.

The chart above shows two prominent software ETFs:

WisdomTree Cloud ETF vs benchmarks (Koyfin) Food and oil prices, higher rates to combat inflation, we all know the story.Īs software companies by and large have a mix of growth-oriented forecasts, free cash flows late into the future, and valuations built on long-duration rather than short-duration financials, these businesses logically sold off. Macroeconomic fears, inflation, and geopolitics have led to a broad risk-off environment that came into investors' periscope in late 2021, and then subsequently picked up speed with the onset of higher-than-expected inflation paired with the Russia-Ukraine war. I make the case for this with industry dynamics, the interplay of macro and costs of capital, and valuation paradigms marked by historical data. In my view, this period presents one of the best times in the last decade to invest in public equity software. In this article, I present arguments for allocating capital to a particular slice of the tech sector that presents an extraordinarily rare opportunity for long-term compounding potential: Software.

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