The ASX exchange-traded fund (ETF) tech space could be a great place to find opportunities that can deliver outperformance in the next few years.
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What has been happening?
Many technology names have taken a hammering since late 2021 as it became apparent that strong inflation was no longer 'transitionary' and that central banks may need to do something to take the heat out of the economy.
The tricky thing for tech shareholders is that the more long-term growth that had been 'priced in' to the share price, the more that a higher interest rate hurts today's value of that technology business.
However, I don't believe that the long-term outlook has changed for any of these tech businesses. So, the cheaper valuations give us a chance to look at these names at better prices.
I'm not going to try to predict when interest rates are going to fall, or by how much. But, I think by 2025 the investment environment may have improved significantly and could lead to stronger returns from these two ASX tech ETFs.
VanEck Video Gaming and Esports ETF (ASX: ESPO)
The name gives it away – it provides investors with exposure to the global video gaming and e-sports business world.
We're talking about names like Nvidia, Advanced Micro Devices, Tencent, Activision Blizzard, Nintendo, Electronic Arts, Two-Take Interactive, Bandai Namco and Ubisoft.
I think this sector is more defensive than investors may think – many video gamers are younger players, who may be less impacted by interest rate movements, and may still want to keep gaming, regardless of what global GDP or what the Federal Reserve is doing.
E-sport audiences have been growing over the long term, which is unlocking new earnings streams like game publisher fees, media rights, merchandise, ticket sales and advertising.
With global games revenue expected to reach around US$200 billion in 2023, according to VanEck sources, I think the 25% fall from November 2021 makes it an attractive time to consider investors.
Betashares Asia Technology Tigers ETF (ASX: ASIA)
Asian tech shares have seen even more pain than the video gaming world. This ASX tech ETF is down almost 50% from February 2021 and it's down around 30% from November 2021.
This investment owns 50 of the largest Asian technology companies outside of Japan. That includes names like Tencent, Taiwan Semiconductor Manufacturing, Samsung Electronics, Alibaba Group, Pinduoduo, Infosys, JD.com and Baidu.
This ASX ETF is invested in a number of areas including internet and direct marketing retail, semiconductors, interactive media and services, interactive home entertainment and so on.
There are certainly risks when it comes to investing in Asian shares. China is a unique economy with unique risks for western investors.
But, it comes with a cheaper valuation. According to BetaShares, at the end of February 2023, the ASX ETF's price/earnings (P/E) ratio was under 18. For businesses with such a powerful position in Asia, and having demonstrated long-term growth, I think this ASX ETF could demonstrate outperformance over the next two or so years.
