2 quality ASX ETFs that could weather an economic storm

Strong balance sheets could help businesses outperform.

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Key points

  • With interest rates now much higher, companies that rank well on a number of quality metrics could be resilient and outperform
  • VanEck MSCI International Quality ETF is invested in 300 global businesses, with a strong weighting to large US tech shares
  • Betashares Global Quality Leaders ETF is an ASX ETF invested in 150 global businesses

There is a lot of uncertainty amid the higher inflation and interest rate environment. I believe quality shares are primed to outperform whatever happens next, which is why I like the two ASX exchange-traded funds (ETFs) in this article.

It has often paid to be optimistic about the future of the share market. The global share market has managed to traverse all of the recessions, wars, politicians and pandemics since 1900.

The full effect of the higher interest rates in the US and Australia may not have been felt yet in the 'real' economy. With that in mind, it may be that businesses with strong balance sheets, low debt, strong cash flow and good profit generation are able to outperform weaker-positioned businesses.

Below are two ASX ETFs that could weather an economic storm.

VanEck MSCI International Quality ETF (ASX: QUAL)

This ETF is invested in around 300 businesses from across the global share market. To get into the portfolio, companies have to rank well on three fundamentals – earnings stability, a high return on equity (ROE) and low financial leverage.

This means the business earns stable profits, earns a high level of profit compared to how much shareholder money is retained within the business, and has a good balance sheet.

Over the past five years, the QUAL ETF has delivered average returns per annum of 14.9%, 3.5% per annum better than the MSCI World ex Australia Index. Though past performance is not a guarantee of future returns.

I like that IT and healthcare have the biggest two weightings, 38.2% and 19.9% respectively. These sectors typically offer good growth prospects. At the end of May 2023, Microsoft, Nvidia, Apple, Meta Platforms and Alphabet were the biggest positions.

While the US makes up around 75% of the portfolio, there is diversification to other countries including Switzerland (6%), Japan (3.7%), the Netherlands (3.2%), the UK (2.8%) and Denmark (2.6%).

Betashares Global Quality Leaders ETF (ASX: QLTY)

The concept of this ASX ETF is that it's invested in 150 global companies that do well on four factors: return on equity, debt to capital, cash flow generation ability and earnings stability.

It's somewhat similar to the QUAL ETF, but the holdings are much more equal, so it's arguably more diversified because there's a smaller allocation to the big tech names.

The biggest holdings are Nvidia, Meta Platforms, Tesla, Alphabet and Adobe. But, the largest three positions in the QLTY ETF amount to 8.2% of the portfolio, whereas it's 16.7% for the QUAL ETF.

This ASX ETF also has the largest investments in the IT (28.2%) and healthcare (20.7%) sectors.

There's a smaller allocation to the US (64.8%), so other countries get a larger allocation including Japan (12.5%), Switzerland (3.9%), France (3.7%), Denmark (3.1%) and the UK (2.1%).

The returns of the index that this ETF tracks have been lower over the past five years, at 12.9% per annum, which is still solid and outperformed the global share market.

Foolish takeaway

I think both of these ASX ETFs can perform, with whatever happens next. I'd probably pick the QLTY because of its more varied diversification with a more even distribution across holdings and countries.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Adobe, Alphabet, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2024 $420 calls on Adobe and short January 2024 $430 calls on Adobe. The Motley Fool Australia has recommended Adobe, Alphabet, Apple, Meta Platforms, and Nvidia. 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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