Exchange-traded funds (ETFs) are a great way to quickly invest into a group of businesses.
Some ETFs have quality business holdings but not much diversification of industry like Betashares Global Cybersecurity ETF (ASX: HACK). Other ones may have acceptable diversification but don't offer strong growth potential like BetaShares Australia 200 ETF (ASX: A200) (due to the high exposure to large ASX banks).
I think the below two ETFs offer a good combination of growth and diversification:
iShares Global 100 ETF (ASX: IOO)
The biggest businesses in the world didn't become the largest by having a poor product or having rubbish financials.
This ETF is invested in the biggest 100 businesses in the world. These businesses have spent many years, or many decades, at the top of their industry.
Big businesses have strong economic moats, robust balance sheets and enviable brand power. A good way to think about how strong the moat of a business is how much you'd have to spend building your own business to beat that company. Could you beat Microsoft's dominance with $10 billion? Or even $100 billion? Google (Alphabet), one of the world's best tech businesses, has to offer its office products for free to get people to use them over Microsoft.
Here are some of the biggest holdings within the ETF today: Microsoft, Apple, Amazon, Alphabet, Johnson & Johnson, Proctor & Gamble, JPMorgan Chase and Intel.
There are plenty of large non-US holdings like Nestle, Roche, Samsung, Novartis, Toyota and Astrazeneca.
As you can see, there's a diverse group of businesses within the ETF. But it has a large allocation to information technology at 28.2%, much higher than the next highest exposure of 15% to consumer discretionary. IT businesses are some of the brightest share prospects because of how the world is going increasingly technological. Tech shares also usually have high profit margins.
Over the past year this ETF has returned 11.80% per annum. The ETF has been around a fairly long time so we can view its longer-term performance – over the past 10 years it has returned an average of 12.57% per annum.
I think this ETF is a great investment option and its management fee is just 0.40% per annum.
BetaShares Global Quality Leaders ETF (ASX: QLTY)
This ETF tracks an index that consists of 150 international shares outside of Australia that have ranked highly for quality.
What does 'quality' mean? Shares are ranked using a combination of factors – return on equity (ROE), debt to capital, cash flow generation ability and earning stability.
When you look at businesses through multiple quality screens you will likely end up with a high quality list of shares. The best of the best. Focusing on quality hopefully means producing better long-term returns than other global share benchmarks.
As of this week, the biggest holdings within the ETF are: Adobe, Nvidia, Apple, Accenture, Intuit, Facebook, Vertex Pharmaceuticals, L'Oreal and Alphabet (Google).
This ETF also has a large allocation to IT, the sector had a 34% weighting at the end of May 2020. Healthcare had a 23.6% allocation, consumer discretionary had a 11.3% weighting and industrials had an 11% weighting.
Has it managed to outperform? Well the ETF isn't that old yet, so we can only look at a short time frame. Over the past year it has made a net return of 18.45%, that's after the 0.35% management fee. Vanguard MSCI Index International Shares ETF (ASX: VGS) has returned 5.24% over the past year. BetaShares Global Quality Leaders ETF shows a strong return after the COVID-19 pandemic and recovery.
Foolish takeaway
I really like both of these ETFs. They are the type of investments that could be your only investment holding for many years and perform well. Or they could be used to add high-quality diversification to your existing portfolio.
Out of the two options I'd probably go for BetaShares Global Quality Leaders ETF. Its holdings are high quality, it has a slightly lower management fee than the iShares Global 100 ETF and it owns more shares which should give better diversification.
