There are certain ASX-listed exchange-traded funds (ETFs) that I'm very optimistic about. I don't know what's going to happen with share markets, but certain characteristics could help deliver strong returns for investors.
The global share market is home to thousands of businesses, but not all of them will be great ones to own for the long term.
Wouldn't it be good to just own a portfolio of the best ones? That's what the two ASX ETFs I'm going to talk about have constructed – portfolios full of purely high-quality businesses that have a good chance to deliver pleasing returns.
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VanEck MSCI International Quality ETF (ASX: QUAL)
Both of the ASX ETFs I'm going to talk about offer fairly similar investment strategies. I have been invested in the QUAL ETF for some time, but I'd happily own units in the other fund (or both).
The QUAL ETF aims to have 300 companies in its portfolio, which are diversified across a range of geographies, sectors, and economies. I like this for the diversification it provides for investors.
VanEck, the provider of this fund, says that investments focusing on companies with quality characteristics have historically delivered outperformance over the long term compared to the global share market benchmark.
The QUAL ETF looks for three fundamentals to decide if a business is high-quality.
First, there's the requirement that they have a high return on equity (ROE). That means they earn a high level of profit for how much money is retained within the business. That demonstrates a high level of profitability and suggests how much the business could make on additional profits retained within the business.
Second, the businesses in the ASX ETF must have stable earnings. In my mind, if earnings aren't going backwards, then it means profit is probably rising, which is a good tailwind for share price growth.
Third, the QUAL ETF's holdings must have low financial leverage. That means the balance sheets are healthy and the ROE hasn't been boosted artificially by utilising a lot of debt.
Unsurprisingly, this has led to its top holdings being names like Meta Platforms, Nvidia, Apple, Microsoft, Eli Lilly, Alphabet, Visa, and ASML.
The investment strategy is clearly working well, with the QUAL ETF delivering a total return per year of 14.8% over the last decade. Time will tell if it can produce further strong returns in the coming years.
Betashares Global Quality Leaders ETF (ASX: QLTY)
There are some differences between the QLTY ETF and the QUAL ETF, which could make the one I'm about to outline seem more appealing in its own way.
The QLTY ETF has only 150 companies in its portfolio, but their weightings are more evenly spread, which, in some ways, makes it more diversified than the QUAL ETF.
This portfolio is also spread across a number of countries, including the US, Japan, the Netherlands, Switzerland, France, Hong Kong, Spain, and the UK. Excitingly, the fund has a double-digit allocation to a number of sectors, including IT, industrials, healthcare, financials, and consumer discretionary.
There are four factors that decide what the QLTY ETF invests in – ROE, debt to capital, earnings stability, and cash flow generation ability. The first three elements are essentially the same as the QUAL ETF, so I won't repeat what they mean. The fourth element – cash flow – means that we want to see earnings translate into cash hitting the bank account.
Since the QLTY ETF's inception in November 2018, it has returned an average of 14.4% per year. I think its future returns are promising, so we'll see how it performs in the coming years, but I'm optimistic.
