The ASX share market is a great place to find investments that can deliver capital growth. Leading exchange-traded funds (ETFs) can give us access to some of the world's most compelling businesses.
But how can we narrow down which are the best companies in the world? Well, there are a few statistics that can tell us how appealing a business is, regardless of which sector they're from.
Arguably, the most important one is the return on equity (ROE). This tells investors how much profit the business makes compared to how much shareholder money is retained within the business.
If a company can make a 50% ROE, then shareholders are getting a great deal, and it's beneficial for that business to retain a lot of profit and re-invest it. If the business continues making an ROE of 50% on new money invested within the company, then it could deliver impressive share price growth.
Businesses that generate a low ROE may not achieve large compounding returns over extended periods of time because any retained profit is making a low return.
If we can combine a high ROE with resilient and growing profits and healthy balance sheets, we could achieve pleasing returns.
These are high-quality ASX ETFs
I believe that quality-based ETFs can outperform over the long term. High ROEs can result in stronger profit growth than average, while resilient profit generation may help a business avoid the worst of a bear market sell-off.
I want to mention three ASX ETFs, but remember that past performance is not a guarantee of future performance.
The Betashares Global Quality Leaders ETF (ASX: QLTY) is invested in 150 companies worldwide. It looks for companies with a high ROE, low debt-to-capital ratio, strong cash flow generation ability, and earnings stability. Since its inception in November 2018, it has delivered an average annual return of 15.6%.
The VanEck MSCI International Quality ETF (ASX: QUAL) is invested in approximately 300 companies worldwide. This ASX ETF only invests in businesses with a high ROE, good earnings stability, and low financial leverage. Since its inception in October 2014, it has delivered an average annual return of 16.5%.
The VanEck MSCI International Small Companies Quality ETF (ASX: QSML) is quite different from the first two ETFs I mentioned. It invests in 150 small-cap quality companies from internationally developed markets. Those small caps rank well on three fundamentals: ROE, earnings stability, and low financial leverage. Since its inception in March 2021, this ETF has returned an average of 14.75%.
Each of these funds offers quality portfolios but with quite different exposures. I'd be happy to have any of them in my portfolio. But, the stock picker in me is particularly attracted to the QSML ETF because I like the concept of investing in smaller businesses that are growing.
