The ASX-listed exchange-traded fund (ETF) VanEck MSCI International Small Cos Quality ETF (ASX: QSML) could be one of the most exciting options to consider right now.
After the tariff trade war impacts on the share market, small-cap global businesses have seen their share prices decline. That's why the QSML ETF unit price has declined more than 10% from 22 January 2025.
The QSML ETF is not just a buy in my mind because it has fallen, though I do like investing when prices are lower. My bullishness is due to the quality of its holdings and how strongly it could perform in the coming years.
Aside from the cheaper valuation, let me explain why this fund is so compelling to me.
High-quality ASX ETF
The businesses in this portfolio are viewed as some of the world's highest-quality small companies based on three key fundamentals.
First, the businesses must have a high return on equity (ROE). That means they must make a lot of profit for how much shareholder money is retained within the business. It also implies they can make strong returns on additional retained profit in future years.
Second, they must have earnings stability, which is helpful for relative share price stability and may suggest steadily climbing earnings.
Third, they should have low financial leverage on their balance sheets. In other words, they should be financially healthy businesses.
In summary, only the best smaller global businesses are in this portfolio.
Geographic diversification
Small caps can be a volatile place, so it could be a good idea to own investments listed in a variety of countries.
This ASX ETF has 150 holdings spread across several markets. Just because a company may be listed in the US doesn't mean 100% of its earnings come from the US. Even small caps can have global earnings or at least plans to expand internationally.
Looking at the country weightings, here are the allocations: the US (81.5%), the UK (6%), Japan (3.7%), Switzerland (2.8%), Sweden (1.3%), Canada (1.2%), Israel (1.1%), France (0.7%), Mexico (0.6%), Bermuda (0.6%), and Finland (0.5%).
While the ASX ETF does have a heavy weighting to the US, that just happens to be where most of the strongest smaller companies are currently listed. If more small, great businesses appeared in Germany, the UK or elsewhere, the holdings would reflect that over time.
Sector diversification
In recent years, the technology sector has driven strong returns.
The QSML ETF has not relied on tech stocks to generate an average return per annum of 13.9% over the three years to 28 February 2025.
The industries with a weighting of at least 5% include industrials (37.7%), financials (17.9%), consumer discretionary (9.6%), IT (9.4%), healthcare (7.5%), materials (6.5%), and consumer staples (5.9%).
I think this is a great period to invest in small, quality businesses which are now cheaper.
