The number of exchange-traded funds (ETFs) on the ASX has exploded in recent years, giving investors a variety of choices.
Based on market capitalisation, the three most popular ASX ETFs, by far, are as follows:
- The Vanguard Australian Shares Index ETF (ASX: VAS). which tracks the S&P/ASX 300 Index (ASX: XKO)
- The iShares S&P 500 ETF (ASX: IVV), which tracks the S&P 500 Index (SP: .INX) in the United States
- The Vanguard MSCI Index International Shares ETF (ASX: VGS), which tracks the MSCI World ex-Australia (with net dividends reinvested) in Australian dollars Index
Do you see a common thread?
All three ASX ETFs track market-cap-weighted indexes.
A market-cap-weighted index is a list of companies ranked and weighted according to the size of their market capitalisation.
Market capitalisation is a company's share price multiplied by the number of shares on issue.
There's nothing wrong with investing in market-cap-weighted indexes. They deliver 'market average' returns and, historically, those returns have been great!
According to Vanguard, US shares (defined as the S&P 500) have delivered an average annual total return of 11.1% over the past 30 years.
Aussie shares (defined by Vanguard as the S&P/ASX All Ordinaries Total Return Index), have delivered an average total return of 9.1%.
And international shares (defined as the MSCI World ex-Australia Net Total Return Index AUD Index) have returned 8.2% per annum.
What's the catch?
Depending on your mindset, you may feel there are a couple of potential catches with ASX ETFs tracking market-cap-weighted indexes.
Firstly, some of the smaller companies ranked in an index like the ASX 300 are young, growing, unprofitable businesses.
Are you comfortable investing your money in them?
Secondly, a stock's market capitalisation can rise or fall for many reasons, one of them being simple market sentiment.
Sentiment simply means how investors are feeling. And let's be honest, we can be a pretty erratic and irrational bunch at times.
Investors can push up a stock's price (and thus, its market cap) based on mere speculation, not fundamental analysis.
Are you comfortable with market sentiment impacting the value of your portfolio?
You might say yes to both of these questions, and that would be perfectly understandable.
After all, market average returns from market-cap-weighted indexes, over the long term, are more than satisfactory.
In fact, the market average each year often beats the many investment funds out there charging a lot of money to select stocks for you!
What's an alternative to ASX ETFs tracking market-cap-weighted indexes?
One alternative is investing in ASX ETFs tracking what are called 'quality' indexes.
These indexes are comprised only of companies that meet certain quality metrics.
An example is the VanEck MSCI International Quality ETF (ASX: QUAL).
The QUAL ETF seeks to track the MSCI World ex Australia Quality Index before fees.
The index is comprised of stocks that meet three fundamental metrics.
Those metrics are a high return on equity (ROE), earnings stability, and low financial leverage.
There are approximately 300 stocks in this ASX ETF spanning a range of geographies and market sectors.
VanEck created the QUAL ETF in October 2014. Since its inception, this ASX ETF has delivered an average annual total return of 15.42%.
Note that this is higher than the market average of the market-cap-weighted indexes mentioned above, albeit over a shorter timeframe.
Andrew Wielandt of DP Wealth Advisory
On The Bull this week, Wielandt explained his recommendation:
QUAL provides exposure to a diversified portfolio of international companies.
It focuses on quality businesses. Apple, Meta and Microsoft are among the numerous businesses in its portfolio.
Main sectors include information technology, healthcare and industrials.
QUAL has risen from $31.25 on May 18, 2020, to trade at $55.70 on May 8, 2025. In our view, QUAL offers a bright, long term outlook.
The ASX ETF charges a management fee of 0.4% per year.
