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

Should investors be excited by this tech fund?

| More on:
two women looking intently at computer screen

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

More on ETFs

ETF written on cubes sitting on piles of coins.
ETFs

3 excellent ASX ETFs I think are a buy right now

I think these ASX ETFs all have excellent growth potential.

Read more »

The letters ETF with a man pointing at it.
ETFs

Why these ASX ETFs could be fantastic buy and hold options

These ETFs could be quality long-term options for investors. But why?

Read more »

Businessman at the beach building a wall around his sandcastle, signifying protecting his business.
ETFs

Both of these excellent ASX ETFs are on my buy list

I love the look of these ASX ETFs, I’m expecting to buy at least one.

Read more »

a business person checks his mobile phone outside a Wall Street office with an American flag and other business people in the background.
ETFs

Here's what makes the Vanguard US Total Market ETF (VTS) stand out from other index funds

This ETF offers something that no other ASX index fund does.

Read more »

ETF written in yellow gold.
Gold

Should you buy ASX gold ETFs right now?

Is gold a 2024 fad or still a good long-term investment?

Read more »

Cubes placed on a Notebook with the letters "ETF" which stands for "Exchange traded funds".
ETFs

How much money should I put in one ASX ETF?

Does your ASX ETF provide good returns and the required diversification?

Read more »

ETF spelt out with a rising green arrow.
ETFs

5 excellent ASX ETFs to buy next week

These ETFs offer investors access to all corners of the market.

Read more »

Accountant woman counting an Australian money and using calculator for calculating dividend yield.
ETFs

If I'd put $5,000 in iShares S&P 500 ETF (IVV) at the start of 2024, here's what I'd have now

It has been an incredible start to the year for the US share market.

Read more »