I believe that ASX-listed exchange-traded funds (ETFs) are among the best investments Australians can buy because of the returns and diversification they offer.
However, not all ASX ETFs are created equal. Some options are better than others because they are higher quality and internationally diversified.
I believe that VanEck MSCI International Quality ETF (ASX: QUAL) and Betashares Global Quality Leaders ETF (ASX: QLTY) are two of the best picks investors could make, which is why I'm an investor myself. Let's look at the positives – they each target multiple factors to pick stocks to build their portfolio.
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Diversification
Each of these ASX ETFs look across the world to build a wonderfully diverse portfolio across hundreds of stocks in different sectors.
The QLTY ETF looks to invest in 150 global companies, while the QUAL ETF has around 300 names in the portfolio. They provide exposure to high-quality companies from across the world, including the US, Switzerland, the UK, Japan, the Netherlands, Germany, France, Germany, Denmark and so on.
I think it's a good idea for Aussie investors to have exposure to various markets, not just Australia, because the ASX only makes up a small portion of the global stock market. There are many other good businesses out there in the world.
But, these ASX ETFs aim to only invest in the best global businesses by ranking stocks based on multiple elements.
Return on equity
Both funds want to choose businesses with a high return on equity (ROE). That means they need to make a high level of profit for how much shareholder money is retained within the business.
The higher the ROE, the higher the quality of the business. It also suggests the business can earn a high ROE on future retained profits, which bodes well for potential shareholder returns.
Debt levels
Both ASX ETFs want to invest in businesses that have low debt levels for their size. This means they are in a healthier financial position than average. Their balance sheets can generate interest income if they have strong cash levels, as opposed to experiencing high interest costs if they have a lot of debt.
The businesses in the portfolio also have the financial firepower to make acquisitions, rather than being exposed to a takeover during economic downturns.
Consistent earnings
The third factor that both funds look for in a business is earnings stability. That suggests that the profit doesn't usually go backwards. If earnings aren't going down, then it likely means profit is rising – that's a great tailwind for share price growth over the long-term.
Cash flow generation
There is an additional characteristic that the QLTY ETF looks for – cash flow generation ability. It's important to see that accounting profit translates into real money that's flowing through the business bank account.
Great results
Past performance is not a guarantee of future results, but both the QLTY ETF and QUAL ETF have delivered pleasing returns for investors. I expect their long-term returns will continue to be solid.
Since inception in November 2018, the QLTY ETF has returned an average of 13.6% per year.
The QUAL ETF has returned an average of 15.2% per year since its inception in October 2014.
I think these funds can work nicely with a portfolio of ASX shares.
