The VanEck MSCI International Quality ETF (ASX: QUAL) is one of the ASX's great exchange-traded funds (ETFs), in my view. It has a number of positive aspects, which I think everyone should know.
ETFs are an excellent way for people to invest. They enable us to gain exposure to a wide group of businesses/assets through a single investment.
Sure, the Vanguard MSCI Index International Shares ETF (ASX: VGS) is a popular and effective way to invest in the global share market. But rather than its 1,300 holdings, what if we want to own only the best of the best shares while still gaining global diversification?
The QUAL ETF can be a great solution because of several factors. Let's take a look.
Image source: Getty Images
Great businesses
The QUAL portfolio holds (approximately) 300 businesses from a number of different countries, including the United States, Switzerland, the United Kingdom and Japan.
While the VanEck MSCI International Quality ETF's diversification is pleasing, the quality of the underlying holdings is particularly compelling.
A company must meet three criteria for inclusion in the portfolio: high return on equity (ROE), earnings stability, and low financial leverage.
A high ROE means the company is making a high return for how much shareholder money is retained within the business. It is a sign of quality, but it also suggests that the company can make strong earnings on profits retained within the business, which I believe is great for long-term shareholder returns.
Good earnings stability may suggest that the company does not see profit decline (noticeably) during economic downturns. If the profit doesn't drop, the share price could also be pleasingly resilient and help the VanEck MSCI International Quality ETF outperform the wider share market.
Low financial leverage is good for a number of reasons, including having a lower-cost balance sheet and having more financial flexibility.
Outperformance
Past performance is not a reliable indicator of future performance, but the QUAL ETF has performed so well and consistently that, thanks to its quality characteristics, I believe it can continue outperforming over the long term.
The QUAL ETF has returned an average of 15.69% per annum over the last decade and 15.66% per annum over the past five years. The MSCI World ex-Australia Index, which the VGS ETF tracks, has delivered an average return per annum of 13.4% over five years and 13.2% per annum over ten years.
In other words, the QUAL ETF has outperformed the global share market by an average of more than 2% per year over the long term. Stronger returns can help us grow our wealth faster and potentially shave months or years off our retirement date.
Fair fees
For an active manager to create a portfolio focused on quality global shares, I wouldn't be surprised if they charged at least 1% in annual management fees, possibly more. While fees can be worth it sometimes, there's no doubt they reduce the overall returns.
I believe the QUAL ETF has very reasonable annual fees of 0.40% and no outperformance fees. Compare that to the Magellan Global Equities Fund (Currency Hedged) (ASX: MHG), which has an annual management fee of 1.35% and also performance fees.
When you combine these elements, the VanEck MSCI International Quality ETF is a very compelling fund, in my view.
