Aussies can buy some very compelling exchange-traded funds (ETFs) on the ASX because of the quality and diversification they offer.
Many great businesses call the ASX home, but the Australian share market only makes up around 2% of the global share market.
I think it'd be a mistake to avoid investing in some of the world's best companies, but it can be tricky to try to decide which ones to choose. Why not invest in a whole portfolio of global shares?
I believe the below two ASX ETFs can provide an attractive combination of returns and diversification.
VanEck MSCI International Quality ETF (ASX: QUAL)
There is no specific number of stocks that we need to own to diversify well, but with this investment, we're gaining exposure to around 300 businesses.
The holdings are chosen not for their geographic exposure but for their underlying quality. Leading global businesses are selected for their high return on equity (ROE), earnings stability, and low financial leverage to make it into the QUAL ETF portfolio.
This means those businesses earn high profits on retained shareholder money, have good balance sheets and don't usually experience sizeable profit declines.
Currently, the QUAL ETF portfolio's biggest positions include Nvidia, Apple, Microsoft, Meta Platforms, Eli Lilly and Novo Nordisk.
Past performance is not a reliable indicator of future performance, but over the past three years, this fund has delivered an average return per annum of 14.4%. Over the past five years, it was 17.1% per annum, outperforming the global share market by an average of at least 3% per year over both timeframes.
Over the long term, I think this portfolio can continue to outperform the global share market because it owns only high-quality businesses.
BetaShares Global Sustainability Leaders ETF (ASX: ETHI)
This is another globally-focused fund, but this one owns 200 businesses.
The ETHI Etf starts with the global share market and then applies a number of screenings to exclude less 'ethical' businesses based on environmental, social and governance (ESG) factors. Investors can feel good about owning these ASX shares.
The fund excludes businesses if they're involved in areas such as fossil fuels, gambling, tobacco, uranium and nuclear energy, armaments and militarism, destruction of valuable environments, animal cruelty, chemicals of concern, alcohol and payday lending.
It also avoids investing in businesses where there is evidence of human rights violations, including child labour, forced labour, sweatshops, bribery and corruption.
Another factor it takes into account is whether there is board diversity. It excludes businesses that have no women on the board of directors.
Its biggest holdings are currently Nvidia, Apple, Visa, Home Depot and Mastercard.
Coincidence or not, this portfolio of 'ethical' businesses has performed very well – in the past five years, it has returned an average of 17.4% per annum. Past performance is not a reliable indicator of future performance, of course, but I think it could keep rising over time.
