There are a few high-quality ASX-listed exchange-traded funds (ETFs) that I believe could be strong options to weather the building trade war between the US and China.
While Trump did pause tariffs of more than 10% on some countries, nearly all countries are still getting a 10% tariff, which is more than it was before. Australia is one of the many countries hit by the unfortunate developments with global trade.
Amid all of the volatility, I think the Betashares Global Quality Leaders ETF (ASX: QLTY) is a strong option to consider.
The trade war has opened up questions about whether the US and/or the global economy are headed towards a recession. With that in mind, I'll run through some factors why this ASX ETF could work well for investors.
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Return on equity
There are four factors that businesses must rank well on to enter this portfolio of 150 companies from across the world.
The first factor is return on equity (ROE), which tells investors how much profit a company makes on the shareholder money that is retained within the business. A higher ROE is a great sign of a company's quality by itself, but it also implies that companies can generate strong returns/profit growth on additional retained profit.
I'd suggest that a company that can maintain (or grow) a high existing ROE has a good chance of delivering solid shareholder returns.
Debt-to-capital
Businesses in this ASX ETF must also have a good balance sheet with low levels of debt for their size. I'd say it's good to have minimum debt because of the interest costs in this era of higher interest rates. Investors also view businesses with low debt as a healthier.
Cash flow generation
These businesses are generating real cash flow from the profit they're reporting. The money isn't getting stuck at the debtor phase with customers, it's flowing through the company's bank accounts.
Good cash flow allows the business to improve the balance sheet and show to investors that it can handle anything that happens in the next few weeks, months or years.
Earnings stability
The businesses in the QLTY ETF also have stable (consistent) earnings. That doesn't mean they don't see any growth, but it's rare for them to suffer an earnings decline.
Given that investors normally judge businesses based on how much profit they make, limited declines in earnings could is likely to make these stocks less volatile.
Overall, I think there's a lot to like about this ASX QTY. I think it could outperform the wider market in the coming years whilst uncertainty is heightened.
