Make Money in Software the Easy Way

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the software industry to thrive as more and more people use technology in many areas of their lives, the iShares S&P North American Tech-Software ETF (NYS: IGV) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.48%.

This ETF has performed well, beating the S&P 500 (INDEX: ^GSPC), on average, over the past three, five, and 10 years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

With a low turnover rate of 18%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Several of this ETF's components made strong contributions to its performance over the past year. Speech-software specialist Nuance Communications (NAS: NUAN) gained about 43% over the past year, partly on excitement that its software may be included in Apple products. (Many are still waiting for Nuance software to be widely used by doctors in digital patient records -- IBM (NYS: IBM) actually has a promising product for that niche; its Watson supercomputer that can assist doctors in diagnosis and treatment planning.)

Cadence Design Systems (NAS: CDNS) gained about 24%, providing software to aid in the design of circuitry and semiconductors. Cadence's future looks promising, with customers such as Intel (NAS: INTC) telling the design industry exactly what they need and revenue starting to rise after slumping for a while.

Other companies didn't add as much to the ETF's returns last year but could have an effect in the years to come. Design software specialist Autodesk (NAS: ADSK) shed about 10% over the past year but sports strong growth rates and returns on investment and little to no debt. It also holds competitive advantages such as switching costs (once people learn its systems, they're less likely to switch to another vendor) and network effects (as more professionals use its software, others are more likely to adopt it).

The big picture
Demand for software isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Learn aboutthe best dividend ETFs. And if you're looking for some great investments beyond ETFs, consider these10 Stocks for Your Retirement Portfolio.

At the time this article was published Longtime Fool contributor Selena Maranjian owns shares of Intel and Apple, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Apple, Intel, Autodesk, and IBM. Motley Fool newsletter services have recommended buying shares of Nuance Communications, Intel, and Apple; as well as creating a bull call spread position in Apple and a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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