A broad index fund can be a great way to build wealth, but some exchange-traded funds (ETFs) take a more selective approach.
If I wanted to give myself a chance of outperforming the wider market over the long term, these are three ASX ETFs I would consider.
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Betashares Global Quality Leaders ETF (ASX: QLTY)
The QLTY ETF looks for global companies displaying characteristics such as strong profitability, healthy balance sheets, and relatively stable earnings.
I like this approach because long-term wealth creation often comes from businesses that can keep reinvesting successfully rather than simply being large.
The portfolio includes companies from several industries and countries, so investors are not relying on one particular sector to deliver the returns.
Quality businesses can still become expensive or experience disappointing periods, of course. But over a long timeframe, I think concentrating more money in companies with strong financial characteristics gives the fund a reasonable chance of producing attractive returns.
VanEck Morningstar Wide Moat ETF (ASX: MOAT)
The MOAT ETF takes the idea one step further by considering both business quality and price.
It invests in US companies that have sustainable competitive advantages, or economic moats, while also trading below fair value.
Those advantages could come from strong brands, switching costs, network effects, or other characteristics that make it difficult for competitors to take customers and profits away.
I particularly like the valuation element. Owning a great company does not guarantee a great investment if the starting price is too high. The MOAT ETF regularly adjusts its portfolio towards businesses offering the most attractive combination of competitive strength and valuation.
That gives it a different process from an index that simply puts the most money into whichever companies have the largest market values.
Betashares Australian Quality ETF (ASX: AQLT)
I would also consider applying a quality filter closer to home.
The AQLT ETF invests in Australian shares selected using measures including profitability, earnings stability, and financial leverage.
I think this could be a good alternative to simply owning the entire Australian market.
Traditional market-cap-weighted funds can become heavily influenced by the largest companies and sectors on the ASX. The AQLT ETF instead asks whether a business demonstrates strong financial characteristics.
That can result in a portfolio focused on companies that have already demonstrated an ability to generate strong returns from their businesses.
There is no guarantee that those characteristics will lead to market-beating performance, but I think the process makes sense for investors willing to take a more selective approach.
Foolish takeaway
Trying to beat the market is difficult, and even professional investors regularly fall short.
That is why I would want a clear reason for moving away from a simple index fund.
For me, quality, sustainable competitive advantages, and sensible prices are three characteristics worth backing.
These ETFs package those ideas into diversified portfolios, giving investors a way to pursue outperformance without having to pick stocks themselves.
