Although the technology sector retains a relatively small weight within the local share market by global standards, it nonetheless has the potential to offer attractive long-term growth opportunities for investors. In this regard, a convenient and diversified way to tap into this potential is via the recently launched BetaShares S&P/ASX Australian Technology ETF (ASX: ATEC).
S&P/ASX All Technology Index
Technology has been one of the standout global industry sectors during the bull market of recent years, with companies such as Google, Amazon and Facebook now household names around the world. Although a relatively small share of the overall share market, Australia has developed its own group of quality technology companies.
As has been the case worldwide, for example, several local internet businesses such as carsales.com, Webjet and REA have successfully disrupted the established retailing and media industries to grow into dominant businesses in their own right. Afterpay is a more recent addition in the consumer space, with its innovative ‘buy now, pay later’ transaction service. There is also a growing range of technology services for business, such as Xero online accounting and global logistics software supplier WiseTech Global.
To capture this broad array of local technology companies, the S&P/ASX All Technology Index was recently launched by the ASX and is the index which the ATEC ETF aims to track.
The index includes ASX-listed companies within a diverse range of industry segments such as information technology, medical technology, consumer electronics, online retail, interactive media and internet marketing services – subject to each company having a minimum market capitalisation of $120 million and minimum levels of daily market liquidity.
Potential for solid returns
As can be seen in the chart below, the S&P/ASX All Technology Index has produced relatively strong returns in recent years compared to the broader Australian market, in line with the outperformance of the technology sector globally (albeit with greater volatility than the broader market, given its tech-sector concentration).
Between April 2014 and April 2020, the S&P/ASX All Technology Index1 produced an annualised return of 13.2% p.a., compared with a return of 4.6% p.a. for the S&P/ASX 200 Index. In recent times in particular, the outperformance has been marked, with the All Technology Index outperforming the broader Australian sharemarket by 15% in the 2020 YTD to 21 May 2020.
Past performance is not an indicator of future performance. You cannot invest in an Index.
Diversification from banks and miners
Given the top-heavy nature of the Australian equity market, not only does ATEC potentially provide a good long-term domestic growth opportunity, it also offers a handy means of reducing exposure to the fortunes of the large and long established financial and mining companies that dominate our market.
Rules-based retention of exposure to the top companies
Last, but not least, in such a dynamic sector as technology, there’s something to be said for a transparent rules-based indexing strategy that weights companies according to their market capitalisation.
The S&P/ASX All Technology Index is rebalanced quarterly, to ensure the relative weighting of companies within the index is reflective of shifting relative market capitalisation. This means that rather than trying to actively pick winners, regular index re-balancing effectively lets the market decide which companies should be included in or excluded from the index – and ATEC’s portfolio holdings – over time.
As such, while such a rules-based strategy is considered a passive style of investing, it can actually be quite active in terms of the companies included in or excluded from the index over time.
All up, ATEC provides a handy new growth opportunity for Australian equity investors that also allows them to diversify exposure away from the large cap financial and mining stocks that dominate the local share market.
Index launch date is 21 February 2020. All information relating to periods prior to the launch date is back-tested by the index provider using the index methodology in effect as at the launch date