There are a number of great ASX-listed exchange-traded funds (ETFs) available to Aussies. I'm looking for investments that could outperform the S&P/ASX 200 Index (ASX: XJO).
The VanEck MSCI International Small Cos Quality ETF (ASX: QSML) is one investment that I think could deliver strong returns over the long-term.
I'm bullish about the ASX ETF for a number of reasons. Let's get into what makes it an effective investment today.
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Better valuation
When it comes to investing in growing businesses, I think it's a great time to invest when there's a dip (or worse) in share prices.
As legendary investor Warren Buffett once said:
Be fearful when others are greedy and greedy when others are fearful.
In other words, it's great to load up on shares when prices are lower and the market has lost confidence (temporarily).
High-quality holdings
This ASX ETF invests in a portfolio of 150 international developed-market small-cap quality growth shares.
The idea is that the portfolio contains some of the world's highest-quality companies which are based on three key fundamentals.
The first fundamental is they must have a high return on equity (ROE). That means the business makes a high level of profit for how much shareholder money is retained in the business. It also suggests that future retained earnings could earn a high level of return, which is a good tailwind for future share price growth.
Second, the businesses must have a high level of earnings stability. In my view, if profit isn't going backwards then it means it's rising. That's another tailwind for share price growth, as well as potentially being a relatively safe harbour during volatile times.
Third, the businesses should have lower financial leverage. This means they have very healthy balance sheets.
Great long-term returns
When you add all of those elements together, it's no wonder that the QSML ETF has performed strongly over time.
Past performance is not a guarantee of future performance of course, but I think the businesses inside this portfolio are some of the most compelling businesses that investors could want to own in the global share market.
Over the past 10 years, the index that this ASX ETF follows has returned an average per year of 14%, outperforming the overall small-cap global share market by an average of around 2.7% per year.
I think if any ASX ETF can return by more than 10% per year over the long-term, that means it's a great long-term investment.
Good diversification
It's important to note that the returns this ASX ETF generates is from more than just a few large US-based technology businesses.
Aside from the US, there are numerous countries that have a weighting of at least 0.5%: the UK, Japan, Canada, Switzerland, Sweden, Thailand, Israel, Denmark, France, Mexico, Finland and Austria.
On the sector side of things, there are five sectors that have a weighting of at least 7.5%: industrials (41.5%), financials (17%), IT (11.8%), consumer discretionary (8.6%) and healthcare (7.6%).
