I love owning good investments in my portfolio. There are great ASX shares, but there are plenty of compelling businesses outside of the ASX too. My portfolio is quite focused on ASX shares because that's where I spend my time researching.
But it'd be good for me to get more diversification without necessarily reducing my returns. That's where exchange-traded funds (ETFs) come in. Good ETFs can provide diversification as well as solid returns.
The two ETFs I'm going to discuss below offer quality and exposure to different industries that largely aren't available in Australia.
VanEck MSCI International Quality ETF (ASX: QUAL)
The QUAL ETF owns a portfolio of 300 global businesses that rank well on quality metrics.
Compared to the ASX, which is weighted to ASX bank shares and ASX mining shares, which largely make their profit in Australia (and New Zealand), this ASX ETF offers a much better spread of investments.
It does have the biggest weighting to IT (with a 33.8% allocation), which I think is a good thing because that's usually where good returns can often be found due to the strong economics of software. Four other sectors have a weighting of more than 9% – healthcare (18.2%), industrials (12.7%), communication services (10.2%) and consumer staples (9.3%).
Geographic diversification is also good. The portfolio includes several countries with a weighting of more than 1%, including the US (75.2%), Switzerland (5%), the UK (3.7%), Denmark (3.2%), Japan (3%), the Netherlands (3%), France (2%), and Canada (1.1%).
But, I don't just want diversification for the sake of it if it were to reduce my returns materially. This ASX ETF only invests in businesses that score well on having a high return on equity (ROE), earnings stability, and low financial leverage.
In other words, it makes good profit for shareholders, the profit doesn't usually experience sizeable declines, and the balance sheet is in good shape.
Past performance is not a guarantee of future performance, but the quality focus has led the QUAL ETF to deliver an average return per annum of 14.9% over the three years to April 2024.
VanEck Morningstar Wide Moat ETF (ASX: MOAT)
Morningstar analysts choose the MOAT ETF's portfolio, which looks at US companies with strong and durable economic moats or competitive advantages.
Competitive advantages can come in many different forms, such as patents, brand power, network effects, cost advantages and switching costs. This ASX ETF is targeting businesses where the competitive advantage is expected to almost certainly endure for the next decade or two.
There's quite a mixture of different businesses at the top of the holdings, including Alphabet, International Flavors & Fragrances, Teradyne and Rtx (which have a weighting of between 3.1% and 2.9%). The smallest position in the portfolio has a weighting of 1%.
The sector allocation within this ASX ETF can change as the investments shift, but at the moment, there are five industries with a double-digit weighting – healthcare (20.8%), industrials (17.9%), IT (15%), financials (14.3%) and consumer staples (11.6%). I like the mixture of businesses here.
Since its inception in June 2015, the MOAT ETF has delivered an average annual return of 15.6%.
I think both ASX ETFs can play a good part in my portfolio, and there's a good chance I'll own at least one of them by the end of 2024.
