The ASX-listed exchange-traded fund (ETF) VanEck MSCI International Small Cos Quality ETF (ASX: QSML) could be a great pick for long-term returns.
When it comes to delivering returns, the big US tech companies have clearly delivered excellent results over the past 15 years. However, the bigger they become, the harder it may be for them to continue growing at the pace they have grown previously.
It could be a smart idea to look at (international) businesses that are much earlier in their growth journeys.
Rather than having to go and identify all of those businesses ourselves, an ASX ETF could give us exposure. Let's examine why the QSML ETF could do the job.
High-quality
This fund aims to invest in some of the world's highest-quality small companies based on three key fundamentals.
First, they must have a high return on equity (ROE). That means companies must generate a high level of profit for how much shareholder money is retained within the business. A high ROE also bodes well for when future profit is reinvested in the business.
Second, the ASX ETF's holdings should have strong earnings stability. Typically, small-cap stocks can be more volatile than blue-chips because they're seen as less strong and resilient. But, earnings stability may help overall business stability in a variety of ways. Plus, if profits aren't going backwards, then that should mean earnings are regularly growing.
Third, these companies should have low levels of debt for their size. While it's important for any business not to be over-leveraged, companies in the growth phase need to ensure they are not taking on too much debt, if any, to fund their growth plans.
When a small cap has all three of these factors, it could indicate a very promising future for the business.
Diversified ASX ETF
It's important to note this fund isn't just a group of smaller US tech companies.
The QSML ETF owns 150 businesses from across the world that rank the highest on the metrics I mentioned above.
While a large portion of the fund is invested in US companies, a number of markets have a weighting of at least 0.4%, including the UK (6.5%), Japan (3.6%), Switzerland (2.8%), Canada (1.4%), Sweden (1.2%), Israel (1.1%), France (0.6%), Mexico (0.6%), Bermuda (0.6%), and Finland (0.4%).
Interestingly, the IT sector only has a 9.4% weighting in the fund, demonstrating its diversification. The other industries with bigger weightings are industrials, with a 37.7% position; financials, with a 17.9% weighting; and consumer discretionary, with a 9.6% allocation.
Historically strong returns
VanEck, the provider of the ASX ETF, notes the effectiveness of investing in growing companies:
Investments focusing on quality small companies have delivered outperformance over the long term relative to other global small companies benchmarks and also relative to large- and mid-cap benchmarks.
According to VanEck, the index that this ASX ETF tracks has delivered an average annual return of 15.2% in the past decade, which is very impressive.
Past performance is not a guarantee of future results, but thanks to its quality focus and underlying diversification, I believe the QSML ETF could be one of the stronger-performing funds over the next ten years.
