When I think of what type of businesses are capable of producing the biggest returns, I'm attracted to the idea of investing in smaller companies via an ASX-listed exchange-traded fund (ETF).
Every large business was a small company at one point. If we can invest in excellent businesses at an earlier stage of their development, then we can ride along with the business as it grows.
However, we don't need to invest in the tiniest ASX shares to buy into a growing business. The ASX ETF VanEck MSCI International Small Cos Quality ETF (ASX: QSML) is a compelling idea for several reasons, in my opinion.
High-quality small businesses
This fund aims to invest in some of the world's highest-quality small companies based on three key fundamentals – a high return on equity (ROE), earnings stability and low financial leverage.
What this says to me is that these businesses earn high levels of profit for shareholders, the profit doesn't usually go backwards and they have a low amount of debt for their size. Just one of those factors makes for an appealing business, but all three of those factors combined is very attractive, in my opinion.
Outperformance
VanEck, the provider of the ASX ETF, says that 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-cap and mid-cap benchmarks.
Impressively, over the last three years, the QSML ETF has returned an average of 14.2% per year. Past performance is not a guarantee of future returns, but with how the QSML ETF is set up, I think it can perform very well in the coming years.
Diversification
This ASX ETF can provide a pleasing level of diversification, just like funds aimed at larger businesses.
The QSML ETF is invested in 150 names from across the world. These businesses come from a number of countries including the US, the UK, Japan, Switzerland, Sweden, France, Mexico and more.
Interestingly, a significant portion of the fund (38.1%) is invested in industrial businesses, which can mean a wide array of areas within that. Other sectors with a weighting of more than 5% in the fund include financials, consumer discretionary, healthcare, IT, resources and consumer staples.
A combination of compelling businesses and good diversification is a winning combination, in my opinion.
