Certain ASX-listed exchange-traded funds (ETFs) look like excellent long-term investments to me because of their focus on quality businesses with strong long-term prospects.
There are many ways to define whether a business is high-quality or not. Some investors look at the return on equity (ROE), some look at earnings growth, some look at economic moats and so on.
When a business has one attractive characteristic, it can be a very good investment. When there are multiple positives, it can be a very pleasing combination of factors.
The two ASX ETFs I'll talk about aim to only invest in the best of the best companies in the world.
Let's get into looking at the two funds.
Image source: Getty Images
VanEck MSCI International Quality ETF (ASX: QUAL)
This fund owns 300 of the strongest businesses in the world.
There are three factors that businesses must rank well on to be included in this portfolio.
First, they must have a high return on equity (ROE). That means the companies generate a high level of profit compared to how much shareholder money is retained within the business. That's a sign of quality of itself, but also suggests they can generate strong profit growth on any retained future profits/money kept within the business in the future, which may lead to pleasing share price growth.
Second, the business should display earnings stability. For me, if profits aren't going backwards then that means they're usually rising, which is a good tailwind for share price gains over time.
Third, these businesses have low financial leverage, which is the sign of a financially healthy balance sheet.
I like that the ASX ETF's portfolio is chosen from businesses across the world, including the US, the UK, Switzerland, Japan, the Netherlands, France and Denmark.
While past performance is not a guarantee of future performance, it's not a surprise to me that the QUAL ETF has returned an average of 14% per year over the last decade, outperforming the global share market by close to 2% per year.
Global X S&P World EX Australia GARP ETF (ASX: GARP)
The GARP ETF is a relatively new ASX ETF, but it is set up in a way that I believe will allow it to deliver very pleasing returns in the coming years.
GARP stands for 'growth at a reasonable price'. In other words, it's trying to invest in growing businesses where the market is undervaluing the potential.
The portfolio has 250 companies spread across various countries and sectors. The countries that it has a weighting of more than 1% includes: the US, Japan, the Netherlands, the UK, Spain, Canada, Singapore, Denmark, Ireland and France.
On the growth side of things, the ASX ETF looks at the three-year sales per share growth and earnings per share (EPS) growth. For the valuation, it considers the earnings to price ratio, which is essentially the price to earnings (P/E) ratio. Finally, on the quality analysis, the fund looks at debt levels and the ROE.
Impressively, the index this new ASX ETF tracks has returned an average of 21.2% per year over the past five years. I think there is a good chance it can outperforming the global share market over the long-term as well, though that's not guaranteed.
