The pros and cons of buying this ASX tech ETF after its 30% rally

Should investors be excited by this tech fund?

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The BetaShares S&P/ASX Australian Technology ETF (ASX: ATEC) has performed strongly, rising by around 30% since the end of October 2023, as we can see in the chart below. So, is the ASX tech exchange-traded fund (ETF) still an investment opportunity after its rally?

Let's take a look.

The ATEC ETF gives investors exposure to a range of technology-oriented market segments such as IT, consumer electronics, online retail and medical technology.

The portfolio currently has 37 holdings. To give you a flavour of the types of companies in the portfolio, these are the biggest 10 positions by weighting:

It's more expensive now

When a share price has surged so much in a relatively short amount of time, it leads to a higher price/earnings (P/E) ratio, which undoubtedly makes the ATEC ETF more expensive.

Share prices can't sustainably rise without good justification. Each business has its own earnings profile, but they all face the same higher interest rate environment, which is meant to push down valuations.

It still could be a long time before interest rates start coming down, with inflation remaining stubbornly higher than central bankers would like. The great investor Warren Buffett once described why interest rates are so important for valuations:

The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be.

So every business by its nature… its intrinsic valuation is 100% sensitive to interest rates.

But there's plenty of growth

Collectively, many of the ATEC ETF's holdings are delivering good growth.

For example, in its recent FY24 half-year result, WiseTech reported free cash flow growth of 13% and statutory net profit after tax (NPAT) growth of 8%. Meanwhile, CAR Group grew adjusted NPAT by 34% to $163 million. Computershare is benefiting from the sustained high interest rates thanks to the large cash balance of clients it makes interest income on.

Ultimately, businesses can justify a high price if the financial and operational performance keeps going well.

Many of the ASX tech shares in this portfolio are among the best stocks in the country.

The ATEC ETF might fall in value in the shorter term (and it would be a better buy), but because of its underlying quality and continuing performance, I think we could see good performance over three or five years.

Motley Fool contributor Tristan Harrison has positions in Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Altium, Pro Medicus, REA Group, Technology One, WiseTech Global, and Xero. The Motley Fool Australia has positions in and has recommended WiseTech Global and Xero. The Motley Fool Australia has recommended Car Group, Pro Medicus, REA Group, Seek, and Technology One. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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