I’m always on the lookout for quality investments. I’ve got two quality exchange-traded funds (ETFs) that could fit the bill.
ETFs are a great way to invest in large numbers of shares. But within that certain index, there may be some low quality businesses that you’d prefer not to get exposure. But you can’t exclude them from the index-based ETF, that’s not how an index works.
But there are a few ETFs out there available to Aussie investors that aim to give exposure only to quality businesses. And they’ve done well over the longer-term:
VanEck Vectors MSCI World ex Aust Quality ETF (ASX: QUAL)
The purpose of this investment is to give investors exposure to a diversified portfolio of quality international companies listed in developed markets around the world.
To be counted as ‘quality’ they have to rank well with a high return on equity (ROE), earnings stability and low financial leverage.
Van Eck says that investments focusing on companies with quality characteristics have delivered outperformance over the long term relative to global equity benchmarks.
The portfolio is invested in around 300 companies across a range of geographies, sectors and economies.
The biggest positions in the portfolio are well known like Microsoft, Apple, Facebook, Alphabet, Johnson & Johnson, Visa, Nestle, Mastercard and United Health. Over 70% of ETF is weighted to the US, but Switzerland, the UK and Japan also have good representation.
After taking into account the annual management fee of 0.40%, over the last five years QUAL ETF has delivered an average return per year of 16%.
Betashares Global Quality Leaders ETF (ASX: QLTY)
QLTY ETF is a similar sort of concept. It’s invested in 150 businesses that are located across the world.
To make it into this ETF’s portfolio, there are four key factors: return on equity, debt-to-capital, cash flow generation ability and earnings stability.
The biggest holdings of this portfolio are a bit different. Not only is the weightings between the positions much more even, but it’s just focused on the FAANG shares.
Its largest 10 weightings are: NVIDIA, Adobe, Facebook, Texas Instruments, UnitedHealth, Accenture, Cisco Systems, Alphabet, Intuit and 3M.
It’s actually slightly cheaper, with an annual management fee of 0.35%. The actual ETF hasn’t been on the ASX that long, but the index it tracks has – that index has returned an average of 17.3% per annum over the last five years.
There’s a bit more global diversification with this one, with the US only amounting to just over 60% of the portfolio.
Summary thoughts
I really like both of these ETFs. They have the potential to outperform over the long term, and do well particularly in market crashes. Quality companies with good cashflow and low debt are less likely to get into trouble in a recession.
