The stock market is trading at a high valuation and this can come with risks. With that in mind, there are a couple of ASX-listed exchange-traded funds (ETFs) that could provide protection in case of a bear market.
There are always risks with the share market, such as geopolitics or higher inflation. But, valuation itself can become a risk if price/earnings (P/E) ratios become too stretched.
Only time will tell if, or when, a correction happens, but share price declines happen enough that the possibility of a drop shouldn't be discounted.
If a decline does happen, it could be spurred by something related to AI and questioning whether the foreseeable future earnings can justify the valuations and money currently being spent.
If there are any questions about the earnings of AI businesses in the future, I don't think there will be as many doubts about the two investments below.
VanEck MSCI International Quality ETF (ASX: QUAL)
This fund aims to invest in the highest-quality businesses in the world. It has a portfolio of 300 names that all tick the requirements of three different characteristics.
The QUAL ETF looks for businesses that have a high return on equity (ROE), earnings stability and low financial leverage.
In other words, these businesses make a high level of profit for the amount of shareholder money held within them. The companies don't usually see earnings fall, which can give investors confidence in the profit numbers it's expected to make. These companies also have healthy balance sheets.
Another positive element of this ASX ETF is that it's invested across an array of sectors and geographies.
The following countries have a weighting of more than 0.5%: the US (78.7%), the UK (4.4%), Switzerland (4.4%), Japan (3.3%), the Netherlands (2.3%), France (1.2%), Denmark (1.1%), Germany (0.8%), Sweden (0.7%), Canada (0.7%) and Ireland (0.6%). It's truly geographically diverse.
Over the past 10 years, it has returned an average of 14.75% per year, outperforming the global share market.
Betashares Global Quality Leaders ETF (ASX: QLTY)
The QLTY ETF is another fund that's focused on high-quality businesses with strong characteristics that could cushion any blow during a possible stock market correction (or worse).
It's set up in a fairly similar way to the QUAL ETF in that it looks for a few different characteristics that make the businesses appealing.
The QLTY ETF looks for a high ROE, a low debt-to-capital and earnings stability, just like the QUAL ETF. But, the Betashares Global Quality Leaders ETF also looks for businesses with a strong level of cash flow generation ability.
Another difference is that this particular ASX ETF is invested in 150 names and the portfolio allocation is more evenly spread across the holdings. The positions also come from across the world and different sectors, which is a powerful force for diversification.
Over the last ten years, the index that this fund tracks has delivered an average return per year of 14.3%.
