Plenty of ASX-listed exchange-traded funds (ETFs) just track a broad index, whether that's the global share market or the S&P/ASX 200 Index (ASX: XJO). Unfortunately, share markets can be volatile sometimes, which is why they're seen as riskier than bonds, cash, and property due to stock market sell-offs.
Wouldn't it be great if there were an investment that could outperform during market downturns? Nothing is guaranteed with the ASX share market, of course, but the way certain ASX ETFs are constructed could enable them to outperform the broader market.
Typically, a share price of a business declines when investors are less confident in the level of profit a company could make in the short term and the next few years. Market shocks like the GFC and COVID-19 saw the profitability prospects of some businesses significantly worsen.
There are at least two ASX ETFs that are purposefully designed that I think could do well with strength in mind: VanEck MSCI International Quality ETF (ASX: QUAL) and Betashares Global Quality Leaders ETF (ASX: QLTY).
Resilient earnings
The QLTY ETF and the QUAL ETF both create a portfolio of global companies that are viewed as high-quality.
There is a key characteristic that makes me believe these funds can provide relative protection in a bear market.
They both only invest in businesses that display earnings stability. If the profit is unlikely to go backwards, then the share price may not go down as much in a bear market compared to businesses reliant on a growing economy for their profit generation (like banks and retailers).
It's possible that an impressive number of the businesses in the portfolios of these ASX ETFs could continue growing their profit, even if the earnings aren't rising as fast in the short term. If the profit isn't declining, then that logically means earnings are rising.
Another characteristic of these companies in these portfolios is that they have strong balance sheets with little debt. Businesses with high levels of debt can run into the risk of breaking their debt covenants in an economic downturn (such as the ratio of profit to debt). There's little chance of that with these businesses, in my view.
The companies in these portfolios also have an impressive return on equity (ROE), meaning they generate strong profits for shareholders.
Strong net returns by the ASX ETFs
The net returns of an investment are across an entire time period, not just during the boom times. It needs to survive during difficult times and hopefully come out the other side in a strong financial position.
Past performance is not a guarantee of future performance, but both of these funds have performed very well, and I'm optimistic they can continue to perform well.
In the last five years, the QLTY ETF has returned an average of 13.5% and the QUAL ETF has returned an average of 15.5%, despite the difficulties of both COVID-19 and the inflationary period.
