2 ASX shares to buy for strong diversification

These two stocks have very useful tailwinds.

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The S&P/ASX 200 Index (ASX: XJO) is significantly weighted to ASX financial shares and ASX iron ore shares. I'm going to talk about two investments that can offer something different, with solid tailwinds and can generate strong returns.

Most of us would know the big players. There are the big four banks: Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), and ANZ Group Holdings Ltd (ASX: ANZ). And the mining giants such as BHP Group Ltd (ASX: BHP), Fortescue Ltd (ASX: FMG) and Rio Tinto Ltd (ASX: RIO).

But there's more to the stock market than iron ore miners and ASX bank shares. I believe the below two stocks can outperform the ASX 200 over the long term.

Close The Loop Ltd (ASX: CLG)

This business promises to send zero waste to landfills, using the items it collects for reuse and recycling.

Close the Loop has a global reverse logistics collection network. It collects print cartridges, commercial printers, desktop printers, laptops, PCs, gaming devices, teleconferencing equipment, monitors, soft plastics and cosmetics.

This ASX share re-manufactures over 500,000 consumer electronics per year and processes more than 25 million print consumables each year. What it can't reuse, it recycles.

Major original equipment manufacturers (OEM) have ambitious ESG targets to increase circularity in the economy. Close The Loop says all OEMs need to partner with providers to achieve these goals, and the ASX share is "at the forefront of this global market trend".

Close The Loop has a three-year revenue-sharing contract with HP in the US. HP wants to reach 75% circularity for products and packaging by 2030 – it recently reached 40%.

In the FY24 first-half result, Close The Loop's revenue increased by 76% to $103 million, and the gross profit margin increased from 32.8% to 36.2%. The underlying net profit after tax (NPAT) jumped 164% to $13.2 million.

I think the increasing focus on sustainability globally in the coming years bodes well for the ASX share.

Betashares Cloud Computing ETF (ASX: CLDD)

The ASX isn't particularly known for its technology stocks. So, why not consider an exchange-traded fund (ETF) that purely invests in cloud software companies?

As the name suggests, this offering from BetaShares invests in businesses heavily involved in cloud computing.

A lot of the world's digital data and software applications are maintained outside of the internet, so strong growth is forecast, according to Betashares.

The portfolio prioritises businesses with a high level of revenue from cloud-based services.

It includes several different subsectors, the major allocations being application software (44.8%), internet services and infrastructure (25.1%), and systems software (9.6%). Others include movies and entertainment (4.7%), human resource and employment services (4%), data centre real estate investment trusts (REITs) (3.9%), and more.

Looking at the geographic allocation, three countries have a sizeable weighting: the US (89.1%), Israel (5.5%), and Canada (4.2%). Many of the underlying earnings are generated from international sources, not just in the domestic markets, so it's more diversified than it seems.

Some of the businesses in the portfolio include Wix.com, Netflix, Salesforce, Workday, Shopify, Zoom and Dropbox.  

These are the sorts of businesses creating new products and services that are changing how we do things in their own way.

Past performance is not a reliable indicator when it comes to a sector like this, but over the past five years, the index the CLDD ETF tracks has returned an average annual return of 10.8%. Over the past 10 years, the index returned an average annual return of around 21.9%.

Motley Fool contributor Tristan Harrison has positions in Close The Loop and Fortescue. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Close The Loop, Netflix, Salesforce, Shopify, Wix.com, Workday, and Zoom Video Communications. The Motley Fool Australia has recommended Close The Loop, Netflix, Salesforce, Shopify, Workday, and Zoom Video Communications. 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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