I really like ASX-listed exchange-traded funds (ETFs) as an investment. They can give us a lot of diversification and exposure to great businesses all in one go. One of my favourites is the VanEck MSCI International Quality ETF (ASX: QUAL).
I'm thinking about progressively building my QUAL ETF holding until it's the largest ETF holding in my portfolio. I already own some units, and I think I'll buy plenty more.
I believe almost every Australian could benefit from having a good level of exposure to the global share market because that's where many of the world's best businesses are found. But, we don't necessarily want to go hunting across every single share market for opportunities.
An ASX ETF can do a lot of the work for us. Owning a chuck of the entire global share market might be a good idea, but refining the selection to top businesses can help produce stronger returns – that's why I like the QUAL ETF.
Fund only invests in the best
This fund looks to invest solely in great companies, which are ranked on three different fundamentals.
First, the companies must have a high return on equity (ROE). That means they must generate a high level of profit for the shareholder money retained in the business. We should want a good internal return on the money that companies invest on behalf of shareholders if they're not going to pay it out as dividends or return the capital.
Second, these companies should demonstrate earnings stability. That means their profit rarely falls, which could support the share price during economic downturns and it also suggests the profit is regularly growing.
Thirdly, the businesses are expected to have low financial leverage. This means they have a low level of debt and a good balance sheet, which comes with a number of benefits. Their interest costs are likely to be low, they shouldn't need to do a costly capital raising during a downturn, and they have the financial firepower to make useful acquisitions.
I think the combination of all three of these factors has allowed the QUAL ETF to achieve an average annual return of 15.6% over the past decade.
Of course, past performance is not a guarantee of future performance for the ASX ETF, but I believe a group of quality global companies is more likely to outperform the global share market than the other way around over the next 10 years.
The ASX ETF provides global diversification
My portfolio is probably too heavily weighted towards ASX shares, even if I believe they're all great picks.
I like that the QUAL ETF provides exposure to 300 of the highest-quality global companies — it is a major positive, in my view.
I'm not sure what percentage of my portfolio this ASX ETF will become, but I'm planning for it to become a double-digit weighting in percentage terms to work alongside my growth and dividend-focused ASX shareholdings.
