ASX-listed exchange-traded funds (ETFs) that offer investors both diversification and solid returns are exactly what I like to see.
It's very useful to be able to buy a whole portfolio of shares with a single investment. That way, we get instant diversification and save on a lot of brokerage instead of buying all those shares ourselves.
We can't know what the returns are going to be without a crystal ball. But, typically, leading businesses with strong qualities tend to keep growing over time as long as the valuation doesn't become too stretched.
I think the iShares Global 100 ETF (ASX: IOO) is a top pick for several reasons.
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Biggest and strongest businesses
This fund owns 100 of the largest global stocks in a single fund.
I think that's compelling because it doesn't own thousands or even hundreds of businesses, just the strongest. Some of those smaller companies outside of the top 100 aren't necessarily the best at what they do nor make the biggest profits.
While it may not be totally ideal for society, the biggest companies have the ability to concentrate power and continue reinvesting for further opportunities. That's an appealing dynamic for shareholders of those businesses as they (usually) increase profit margins as they scale.
Perhaps unsurprisingly, the biggest holdings are the major US businesses, which are truly global powerhouses. We're talking about stocks like Apple, Nvidia, Microsoft, Amazon, Alphabet, Broadcom, JPMorgan and Mastercard.
These businesses typically generate industry-leading returns on equity (ROE), have impressive brand power, make strong cash flow, and have very healthy balance sheets. Due to their strength in virtually all aspects, I think it would take something absolutely monumental for these large businesses to get into serious trouble.
Geographic diversification with the ASX ETF
Pleasingly, this is not just a US-listed fund like the iShares S&P 500 ETF (ASX: IVV). Yes, just over 80% of the portfolio is invested in US-listed companies. But, a significant portion of the underlying earnings comes from across the world, which is good earnings diversification in my view.
A number of countries are currently represented within the ASX ETF with a weighting of more than 1%, including the UK (4.12%), Switzerland (3.09%), France (2.68%), Germany (2.33%), Japan (2.24%), China 1.29%, and the Netherlands (1.17%).
Most importantly, in my mind, is that the fund's geographic flexibility means it should invest in any future winners that come from outside the US. If the next global winner is listed in the UK, Japan, China, or Switzerland, the IOO ETF is likely to invest in it, whereas the IVV ETF (for example) is limited to US-listed names.
I also like that the fund is invested across a range of sectors, such as consumer staples, healthcare, industrials, and financials – it's not just a tech fund. But, if technology businesses are the ones succeeding the most (like they are now), it'll give that exposure.
Reasonable fees helps net returns
It's certainly not the cheapest globally focused ASX ETF. Something like the Vanguard MSCI Index International Shares ETF (ASX: VGS) does have lower fees. However, the net returns are the most important thing.
The IOO ETF has an annual fee of 0.40% and has produced net returns of an average of 16.7% per annum over the prior five years. That compares to an average 13.9% net return per year for the VGS ETF over the last five years.
Of course, past performance is not a guarantee of future returns – I'm not expecting the IOO ETF to deliver as strong returns in the next five years as the last five years. But, I do believe it has a good chance of delivering favourable returns compared to the wider global share market and the S&P/ASX 200 Index (ASX: XJO) for the foreseeable future.
