I think we live in a very lucky period of time to invest where there are wonderful ASX shares and excellent ASX-listed exchange-traded funds (ETFs) we can choose to invest in. I think that makes it very easy to invest for retirement.
The two funds I want to highlight can be good options for both reaching towards retirement and when Aussies are actually in retirement.
They're both focused on high-quality businesses from the global share market, which I think means they're very compelling to own for long-term returns. Let's dive into the appeal of both of them and how I'd use them.
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VanEck MSCI International Quality ETF (ASX: QUAL)
The QUAL ETF invests in a portfolio of approximately 300 global companies across a range of regions, sectors and countries.
There are three fundamentals that a business must rank well on to be chosen for the portfolio.
First, they must have a high return on equity (ROE). That means they earn a high level of profit for how much shareholder money is retained within the business. It also suggests to me that the business can earn a good return on any future additional retained earnings.
Second, they have a high level of earnings stability. If profits aren't going backwards then they're regularly rising – that's a strong tailwind for long-term share price growth, as well as relative stability during recessions.
Third, the businesses must have low financial leverage. In other words, they don't have much debt for their size.
When you put all of this together, it's a diversified fund of high-quality businesses that I'm expecting to deliver ongoing earnings growth.
In the past 10 years, the QUAL ETF has returned an average of 15% per year.
Betashares Global Quality Leaders ETF (ASX: QLTY)
This ASX ETF is constructed using a similar investment strategy as the QUAL ETF.
The QLTY ETF looks to invest in a portfolio of 150 global companies ranked by the highest quality score.
There are four factors that are used to decide on the QLTY ETF's holdings – ROE, debt to capital, earnings stability and cash flow generation. Ensuring profit generation turns into cash flow is a useful metric.
While the QLTY ETF has fewer holdings than the QUAL ETF, its allocation between its positions are more evenly spread, which is also a good form of diversification.
While the inception date of the ASX ETF was November 2018, the strategy it follows has been running for longer. In the past 10 years, the index the QLTY ETF follows has returned an average of 14%.
How I'd use these funds for retirement
Past performance is not a guarantee of future returns of course, but both ASX ETFs have delivered very good returns. If the net returns are similar for the next 10 years, that'd be great for building wealth at a quick pace.
Neither of these funds are known for having a high dividend yield because the underlying holdings don't have a high yield themselves.
But, we can sell a portion of our holding each year to generate pleasing returns.
For example, imagine having $100,000 invested in the QUAL ETF and over the next 12 months it could rise by 10%, taking the capital value to $110,000. The investor could decide to sell $5,000 of units – a 5% 'yield' on the initial $100,000 – and still be left $105,000. That's good cash flow and capital growth, a winning combination for retirement, in my opinion.
