SALES & TRADING COMMENTARY (NOT A PRODUCT OF MORGAN STANLEY RESEARCH) FOR INSTITUTIONAL USE ONLY MS Baskets | Managing Your Beta Hedges - IGV v MSXXSAAS Update: As of Friday’s close, IGV completed its quarterly rebalance. The updated weights confirms that IGV remains heavily weighted by AI winners and infrastructure names which may dilute its effectiveness as a downside hedge for software. Given these dynamics, we are seeing clients migrate to our MSXXSAAS basket. MSXXSAAS removes the infrastructure floor, focusing purely on Software names. It has a 1.11 downside beta to IGV (vs .92 upside) providing more capture of downside (weekly prices going back a year). We are seeing a increase in activity in options on the basket. Clients are increasingly using put spreads to capture the downside or selling upside call to monetize elevated vol. IGV Rebalance: * Mega Cap Buffer: Microsoft and Oracle make up nearly 16-17% of the index. * Thematic Mismatch: Palantir remains the top holding with ~9% weight. * Volatile High Fliers: The index continues to include Bitcoin Miners and Quantum Computing firms introducing idio risks away from Software. Please reach out and let us know if you have any questions. Best, Luiz Luiz Ribeiro, CFA | Executive Director Morgan Stanley | Institutional Equity Division 1585 Broadway, 5th Floor | New York, NY 10036 Phone: +1 212 761-5615 Luiz.Ribeiro@morganstanley.com<mailto:Luiz.Ribeiro@morganstanley.com> From: Ribeiro, Luiz (IED) <Luiz.Ribeiro@morganstanley.com> Sent: Thursday, February 19, 2026 2:17 PM To: Ribeiro, Luiz (IED) <Luiz.Ribeiro@morganstanley.com> Cc: Storey, John (IED) <John.Storey@morganstanley.com>; Shanahan, Kaitlyn J (IED) <Kaitlyn.Shanahan@morganstanley.com>; Borg, Austin L (IED) <Austin.Borg@morganstanley.com> Subject: MS Baskets | Managing Your Beta Hedges - IGV v MSXXSAAS SALES & TRADING COMMENTARY (NOT A PRODUCT OF MORGAN STANLEY RESEARCH) FOR INSTITUTIONAL USE ONLY MS Baskets | Managing Your Beta Hedges - IGV v MSXXSAAS Update: The recent Anthropic release sent shockwaves through the SaaS space, triggering a sell-first & ask questions later mentality. Most clients use IGV to get exposure to the space (SI of $1.1B) however, the current composition of IGV creates a diversification drag for clients looking to hedge pure software displacement risk. The ETF includes mega cap heavyweights and thematic outliers that do not reflect the acute vulnerabilities of the broader SaaS ecosystem. Key Compositional Issues: * Meaningful exposure to large cap, weighted average market cap of $403B * IGV maintains significant weightings in infrastructure winners like ORCL. These names act as a protective buffer that benefit from AI spending. * Includes high MoMO names such as PLTR, which is benefiting from AI tailwinds, thereby further reducing the hedge’s effectiveness during a software specific selloff. * The index currently contains non-core segments, including Bitcoin miners and Quantum Computing firms. These holdings introduce idiosyncratic volatility and factor risks that most not wish to own. IGV v MSXXSAAS: Comparing IGV to our MSXXSAAS basket, there are some clear benefits using the basket: * Baskets is focused on SaaS and not inclusive of unwanted sub sector or themes. * The basket is relatively underperforming IGV by 8% YTD. * Using weekly prices going back a year, correlation is 88%, beta down is 1.11, and bet up is .855. When the sector slides, the basket accelerates and captures more of downside while on relief rallies, the basket snaps back less than IGV. The asymmetry profile you want in a hedge. * Using USE4S, the basket has more exposure to negative momo and size with higher residual vol. Most clients typically look to have the opposite exposures. * From a borrow perspective, IGV is slightly off of GC while MSXXSAAS is GC, which can lead to meaningful savings if it’s a sticky position. [cid:image001.png@01DCB844.7FFFF500] Source: Bloomberg, MS Swaps [cid:image002.png@01DCB844.7FFFF500] Source: Bloomberg, MS Swaps Option on MSXXSAAS: We have seen a notable uptick in client activity trading options on baskets, with recent market volatility accelerating a shift away from ETF options toward more bespoke basket solutions. MSXXSAAS has been a key beneficiary of this trend. Key use cases include: * Downside protection: Clients with long SaaS exposure who are concerned about a potential second leg lower are increasingly using put spreads on the basket, which offer improved downside convexity relative to single‑name or ETF alternatives. * Range‑bound recovery views: Clients who believe any recovery in SaaS may take several quarters are selling upside calls, taking advantage of relatively elevated implied volatility in the space. * Mean‑reversion positioning: Clients looking to participate in a potential near‑term reversion are buying short‑dated call spreads, allowing for defined risk while maintaining upside participation. AI Disruption Spreading – MSXXDIST: Initially, the market focused on enablers and potential disruption to SaaS valuation frameworks. However, the next wave of repricing is likely to occur across industries that monetize human cognitive labor, workflow friction, and administrative work. The basket spans IT services, staffing and recruiting, insurance brokerage, credit and risk analytics, real estate advisory, advertising agencies, healthcare administrative services, legal and compliance information platforms, engineering consulting, retail brokerage, education providers, and selected creative content platforms. Software is ~10% of the basket. This incorporates firms impacted by the latest developments from AI labs such as Anthropic Claude Cowork’s push into Legal & Financial Services (link<https://ms.email.streetcontxt.net/platform/al?a=12843319&ad=4079616614&h=7MNvJ8v&sig=VZVS0a7hWgzKBNiWufQAKFn32W8&v=2&url=https://www.anthropic.com/news/claude-for-financial-services>), OpenAI’s addition of Home Insurance app Tuio (link<https://ms.email.streetcontxt.net/platform/al?a=12843319&ad=4079616614&h=WNlmrlb&sig=Ezbe0dqQWfkR9su9kUIlXaXEIqd&v=2&url=https://chatgpt.com/apps/tuio/asdk_app_6970fc7c958881918cfa39d58fc37e82?utm_source%3Dchatgpt.com>), and GPT 5.3 Codex + Claude Opus 4.6 upgrades (given long-context, agentic focus) The businesses most exposed are those that: * Sell human time * Monetize workflow friction * Intermediate structured information * Depend on seat growth and utilization * Carry high fixed compensation cost bases AI-driven efficiency gains at the end client level translate into: * Lower project headcount * Reduced contractor demand * Slower hiring velocity * Pricing concessions * Vendor consolidation Luiz Ribeiro, CFA | Executive Director Morgan Stanley | Institutional Equity Division 1585 Broadway, 5th Floor | New York, NY 10036 Phone: +1 212 761-5615 Luiz.Ribeiro@morganstanley.com<mailto:Luiz.Ribeiro@morganstanley.com> Kaitlyn J. Shanahan | Vice President Morgan Stanley | Institutional Equity Division 1585 Broadway, 2nd Floor | New York, NY 10036 Phone: +1 212 761-4335 Kaitlyn.shanahan@morganstanley.com<mailto:Kaitlyn.shanahan@morganstanley.com> ________________________________ NOTICE: Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. If you have received this communication in error, please destroy all electronic and paper copies and notify the sender immediately. Mistransmission is not intended to waive confidentiality or privilege. Morgan Stanley reserves the right, to the extent permitted under applicable law, to monitor electronic communications. 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