Investing in excellent shares sounds like a good strategy to me; just buy the good ones and ignore the mediocre stuff. But how are you supposed to know which shares are good and which ones aren't?
There's an ASX-listed exchange-traded fund (ETF) that could help with that.
There are plenty of different ways to judge a business, such as by its balance sheet strength and ability to turn accounting profit into real cash flow.
Here's why I think the Betashares Global Quality Leaders ETF (ASX: QLTY) is a top contender for an ultra-long-term hold.
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Excellent quality screening process
If you were to ask a group of professional investors what are the sorts of characteristics you'd want in a high-quality business that could perform over the long term, they'd probably say things like a good balance sheet with low debt, reliable earnings and strong cash generation.
The QLTY ETF looks for four metrics in companies for its portfolio.
One factor is a high return on equity (ROE), which means the business makes a high profit for the amount of shareholder money retained.
Second, high profitability. That's quite self-explanatory: we want very profitable businesses.
Third, low financial leverage. In other words, little to no debt on the balance sheet.
Finally, a company must rank well on earnings stability. We don't want to see profit regularly take a hit, as that could suggest it's not a reliable business, and the share price could be volatile.
After examining those exclusions, the ASX ETF selects 150 of the best businesses in the global share market for its portfolio.
Good returns with a reasonable fee
Considering the level of analysis done to create this portfolio, I think the annual management fee of 0.35% is very reasonable.
Past performance is certainly not a reliable indicator of future performance, but I'd say the QLTY ETF has done well for investors.
According to BetaShares, this ASX ETF has returned an average of approximately 15% per annum since inception in November 2018.
Due to the quality selection process, I think this fund is capable of continuing to outperform the S&P/ASX 200 Index (ASX: XJO) over the next five or ten years.
Long-term performers
With a high ROE, these businesses just need to keep re-investing in themselves to make good returns and grow their geographic footprint and/or release the next product or service.
Many of the businesses in the portfolio are leaders at what they do and, I think, capable of delivering good returns. I'd say they all have a good track record of producing for shareholders.
For example, some of the biggest positions in the portfolio include Nvidia, Netflix, Cisco Systems, Alphabet, Honeywell, Meta Platforms and Visa. All of which, I think are compelling businesses.
