The ASX-listed exchange-traded fund (ETF) Betashares Global Quality Leaders ETF (ASX: QLTY) is one of the most compelling funds.
The global share market is a very compelling place to find opportunities, but it could take a significant number of hours to figure out which are the high-quality businesses and which ones to buy.
This ASX ETF makes it easy to gain exposure to high-quality businesses, as it only invests in the best stocks.
While being high-quality doesn't automatically mean stronger returns in any given year, I think this portfolio has a good chance of outperforming the S&P/ASX 200 Index (ASX: XJO) and the global stock market over the long-term.
For a company to be considered for this portfolio of 150 names, there are four factors that it must possess.
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High return on equity
Firstly, the business has to deliver a very good return on equity (ROE).
This means the company makes a high level of net profit for much shareholder money is retained within the business. A high ROE is a great sign of the quality of a business and it also suggests the business can deliver a strong return on additional money invested in the business, further driving the bottom line and hopefully sending the share price higher.
Low debt to capital
Debt can be a negative that overpowers a business if it has borrowed too much. Even if it can handle the debt, we've seen how expensive debt can be in the last few years in a higher interest rate environment. This can weigh heavily on profit and cash flow.
The businesses in ASX ETF's portfolio have a relatively low level of debt compared to their size, meaning they're in a more financially sustainable position than many other stocks out there.
Cash flow generation ability
The point of being in business is to make a profit, even if it takes some companies a while to achieve.
But, businesses shouldn't just make accounting profits. Rather, we also should want to see those profits turn into real cash.
By requiring businesses to have the ability to generate excellent cash flow, it means they tick the box of generating real earnings for shareholders.
Earnings stability
In some sectors, such as mining, it's common to see profit decline every so often. This often negatively impacts the share price.
The ASX ETF seeks to invest in businesses that usually don't see profits decline. In other words, profits are regularly climbing. This can help drive the share price higher and may help cushion the decline during times of wider economic disruption.
To me, it's no surprise the QLTY ETF has delivered an average return of more than 15% per year since its inception in November 2018. I believe the portfolio is well-positioned to generate net returns exceeding 10% per year over the next five years.
