The exchange-traded fund (ETF) VanEck MSCI International Small Cos Quality ETF (ASX: QSML) may be one of the most compelling funds that Aussies can buy.
Investing is all about making returns, so why not try to invest in some of the world's most exciting companies?
Some of the world's biggest tech companies are excellent holdings. However, it could also be a good idea to own smaller companies because of their growth potential.
Businesses that are earlier on in their growth journey have more room to deliver great returns. For example, buying McDonald's shares when it had 10,000 global locations would have been better for potential returns than buying when it reached 40,000 locations.
I think there are (at least) three reasons why this fund is really attractive.
Image source: Getty Images
Quality of the ASX ETF
For a business to be chosen for this fund, it needs to rank well on three quality metrics. I think each of these factors can also help us understand what makes a great business.
First, the company needs to have a high return on equity (ROE), which means it's making good profit for how much shareholder money is retained within the business.
Second, the holding must have stable earnings, meaning it doesn't regularly suffer from profit declines. Profit growth is allowed, of course.
Third, the business must have low financial leverage. That means there is relatively little debt on the balance sheet.
This means it's a portfolio full of quality holdings, not just random small businesses, which can help it deliver strong returns. It's not surprising to me that the QSML ETF has returned an average of 12.7% per year since its inception in March 2021. The index this ASX ETF tracks has returned an average of almost 16% per annum over the past decade.
Size
As I've mentioned, I think small businesses have a lot more growth potential than large ones. From little things, big things grow, as the song goes.
The ASX only accounts for 2% of the global share market; therefore, there is a wide array of potential opportunities for investors to consider in the other 98%.
I think it's a good idea to gain exposure to high-quality smaller businesses that could become much larger in the future. Every big business today was small at one point. Hence, I believe it's a good idea to invest in smaller companies and join them on the journey.
Diversification
I believe diversification is an important strategy in most investor portfolios because it can reduce risks without necessarily hurting overall returns.
I like that this ASX ETF invests in companies from various countries, including the US, the UK, Japan, Sweden, Canada, Switzerland, Thailand, France, and so on.
Looking at the sector weightings of this ASX ETF, I'm a fan of how 'industrials' have a very large allocation of 36.9%. Industrial businesses can deliver good growth without necessarily having a huge valuation. Other sectors with a double-digit weighting include financials, consumer discretionary and IT.
When you put all of the different elements of this fund together, I think it's set up to perform well. However, it wouldn't surprise me if it experiences more volatility than a large-cap-focused international fund.
