The current sell-off at Palantir Technologies Inc (NASDAQ:PLTR) has been fast catching up in the software ETFs as well, as the iShares Expanded Tech-Software Sector ETF (BATS:IGV) is witnessing declines, leading to renewed fears about AI-related disruption in the markets.

Palantir has lost over 13% in the last two days, while the IGV ETF is also down more than 5%, making it clear that being invested in high growth AI companies is amplifying downside risk for ETF investors.

As one of the top holdings of the ETF, Palantir's loss is adding to the fund’s woes, which has struggled throughout the year. The ETF was down more than 24% in the last quarter, marking its worst-ever quarterly return since the global financial crisis of 2008, according to FactSet data, as software stocks broadly fell out of favor amid valuation concerns and shifting AI narratives.

AI Spending Shift Hits Software Sentiment

The core issue behind this volatility stems from growing concerns about where the value in the stack will ultimately lie. New numbers released by Ramp's AI Index indicate that Anthropic has seen accelerated adoption among enterprises, now claiming a notable portion of the incremental AI spend.

Their products have reportedly won the majority of new deals in the enterprise segment, completely reversing their position relative to their competitors, who dominated this segment during 2025. This shift has fueled skepticism around companies like Palantir, which rely on integrating third-party large language models rather than building foundational AI systems. This skepticism has also been supported by investor Michael Burry, who has expressed a bearish view of Palantir.

This is largely driven by the perception that firms without a proprietary AI stack and heavily dependent on third-party large language models would be outcompeted as enterprises opt for cheaper, more scalable AI solutions.

ETF Concentration Risk In Focus

The recent moves highlight the concentration risk for thematic ETFs like IGV. With top holdings such as Microsoft and Palantir driving a significant portion of returns, sharp drawdowns and negative sentiments around a few names can ripple across the entire fund.

The selloff has also spread beyond Palantir, with software heavyweights like Salesforce Inc. (NYSE:CRM), Adobe Inc. (NASDAQ:ADBE), and ServiceNow Inc. (NYSE:NOW) hitting fresh 52-week lows, signaling a broader reset in software valuations.

For ETF investors, the key question now is whether IGV's exposure still captures the most lucrative parts of the AI trade, or if the center of gravity is shifting toward model providers like Anthropic, leaving traditional software players playing catch-up.

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