The Big-Cap Tech Stock Has Lagged Behind the Software Breakout. That May Be About to Change

The iShares Expanded Tech-Software Sector ETF (IGV) has been in the spotlight recently, drawing significant attention, and for good reason. Since May 2024, this software-focused ETF has significantly outpaced the broader SPDR Technology Trust ETF (XLK), with IGV gaining 23% compared to XLK’s 10% rise. In November, the momentum picked up even more, and on Tuesday, IGV was one of only three ETFs being tracked to reach new all-time highs.

‍

The IGV ETF comprises 118 holdings, though most are relatively small players. According to data from Koyfin, 80 of these components have index weightings below 0.5%. However, the ETF’s recent performance has largely been driven by just a handful of key stocks, with eight specific names leading the charge. Although some of the smaller stocks have also shown notable gains, these core stocks have been the primary catalysts propelling IGV to unprecedented price levels.

‍

Notably absent among the big drivers of IGV’s recent success is Microsoft (MSFT). Microsoft is the third largest component in both the S&P 500 and the Nasdaq 100, and it remains the largest software stock across these indices. Within the IGV ETF, Microsoft holds the third biggest weighting, trailing Salesforce (CRM) and Oracle (ORCL). However, Microsoft has lagged behind the overall IGV ETF across several time frames. For instance, over the past three months, Microsoft’s stock has gained just 3%.

‍

Examining Microsoft’s Performance

A closer look at Microsoft’s recent stock movements reveals an interesting pattern. The last time Microsoft reached a new high was on July 5, when its price hit $468 before retreating. Since then, the stock has been trading within a volatile range. While dips in Microsoft’s price have been met with buying interest, rallies have been quickly sold off, resulting in a rather choppy short-term trend. Microsoft’s 20-day, 50-day, and 200-day moving averages are all converging within a point of each other—a rare occurrence that typically indicates a lack of clear direction. As such, the daily chart does not present a bullish outlook for Microsoft at this time.

‍

However, looking at the weekly chart offers a different perspective. Microsoft is currently positioned within a large symmetrical triangle pattern, suggesting that the stock may still be gearing up for a potential breakout. Historically, Microsoft has often experienced similar prolonged trading ranges before breaking out, both at significant lows (such as in early 2023) and near all-time highs (in 2020, 2021, and twice in 2024). This historical tendency supports the idea that prolonged consolidation phases within long-term uptrends often result in an upward resolution, making a future breakout for Microsoft a strong possibility.

‍

Relative Performance of Microsoft vs. IGV

Microsoft’s recent underperformance, when compared to the broader IGV ETF, has led to a steep decline in the relative strength line of MSFT/IGV. When viewed on a weekly chart, this decline has produced only the third “oversold” reading for MSFT/IGV within the past decade. Despite this, there is some positive potential in Microsoft’s relative position.

‍

First, the ratio line remains in a long-term uptrend. Second, previous instances of oversold conditions in this ratio were close to major trading lows for Microsoft’s relative performance, suggesting that Microsoft’s current underperformance against IGV may be nearing a turning point. If this trend reverses, Microsoft could play a significant role in IGV’s next upward movement.

‍

A reversal in Microsoft’s recent weakness would benefit IGV, especially considering that the ETF has recently hit new all-time highs by breaking out from a bullish, multi-year pattern. Should Microsoft’s performance pick up, it could contribute to the next leg of IGV’s upward trajectory, enhancing the ETF’s overall growth potential.

‍