ASX-listed exchange-traded funds (ETFs) are a great way for Aussies to get exposure to a wide array of businesses, sectors and countries, depending on what you're looking for. The biggest ASX ETF is the Vanguard Australian Shares Index ETF (ASX: VAS), which was close to $18 billion in size at the end of December 2024. However, while it's the biggest and most popular, it's not the one I'm most attracted to.
For me, there are a few negatives about the VAS ETF that make me reluctant to put money towards it. I like investing in ASX shares, but more than half of the fund is invested in ASX financial shares (33%) and ASX mining shares (18.9%).
Those sectors typically have a low return on equity (ROE), resulting in the VAS ETF having an ROE of 12.4%, according to Vanguard. With the ASX's biggest companies generally paying out a substantial portion of their profits as dividends, this leaves a limited amount of profit within the business. That retained profit then only generates a relatively low return for shareholders because of the low ROE.
The VAS ETF is also primarily invested in companies operating in Australia and New Zealand, which are both great countries, but this lack of variety means limited geographic diversification.
For a few reasons, I think the ASX ETFs VanEck MSCI International Quality ETF (ASX: QUAL) and Betashares Global Quality Leaders ETF (ASX: QLTY) are better options for my money.
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High ROE and other quality factors
All the businesses in the QUAL ETF and QLTY ETF have been chosen for their underlying qualities.
They are picked based on several factors. For the QUAL ETF, the stocks need to have a high ROE, earnings stability, and low financial leverage. The QLTY ETF requires a high ROE, low debt-to-capital, good cash flow generation ability, and earnings stability.
When you put those factors together, it's a very powerful combination.
By having a high ROE, it suggests these companies are very profitable for how much shareholder money is retained within the business (which is an appealing sign of quality), and they can re-invest that generated profit and achieve a high return on it, helping grow profit further at a relatively fast rate.
Global diversification compared to the VAS ETF
While the VAS ETF only invests in businesses listed in Australia, the QUAL ETF and QLTY ETF invest in global portfolios, with their holdings coming from numerous countries.
Unsurprisingly, the US has the biggest allocation, but there are also businesses from the US, Japan, the Netherlands, France, the UK, Denmark, Switzerland, and others.
I believe it's beneficial to have our investments diversified globally to mitigate risks associated with issues in any single country. Additionally, many of these businesses earn profits from various regions around the world, providing them with ample opportunities to expand in places such as South America and Asia, as well as in their core markets.
Returns
Ultimately, it all comes down to making good returns. These two quality ASX ETFs have performed much better than the VAS ETF.
In the past five years, the QLTY ETF has returned an average of 13.9% per year, and since its inception in November 2018, it has returned an average of 15.6% per year.
The QUAL ETF has returned an average of 16.2% per year in the last five years and 15.6% per annum in the past ten years.
In the past five years, the VAS ETF has returned an average of 8% per year, and in the past decade, it has returned an average of 8.5% per year.
I'm not sure what the returns for the next five years will be, but I'm not certain the VAS ETF can return an average return per annum of more than 11% because of the low ROE. In contrast, I'm excited by what the other two quality ASX ETFs could achieve.
