There is a group of ASX shares that I’d call elite. They are ones I’d happily buy and own for many years to come.
I think that there is a place for ASX blue chips like BHP Group Ltd (ASX: BHP) or Telstra Corporation Ltd (ASX: TLS) in some portfolios, but only at the right price.
However, some investments seem so high-quality, they’re worth a spot in most portfolios that are focused on total returns. I believe these are two of the most elite ASX shares:
VanEck Morningstar Wide Moat ETF (ASX: MOAT)
I think that this could be one of the best exchange-traded funds (ETFs) on the ASX, perhaps the best.
The name of the ETF describes it pretty well. I’ll tell you about it.
The provider of the ETF to Aussie investors is VanEck. But the stocks being selected for the MOAT ETF’s portfolio is done by Morningstar, one of the world’s leading investment research businesses.
Analysts from Morningstar are searching the US share market for businesses with ‘wide economic moats’. What does that mean? It’s an analogy to describe the competitive strengths of a business – how difficult is it to cross their ‘moat’ and attack the metaphorical castle? Moats can come in all different forms, such as brand power, cost advantages and so on.
In Morningstar’s eyes, a ‘wide moat’ business is expected to be able to keep generating strong profits for at least a decade or two. Only businesses which are judged to be attractively valued from the wide moat shortlist are then added to the portfolio.
The ETF has 46 positions at the last count, with some of the biggest positions being: Cheniere Energy, Wells Fargo, Corteva, Lockheed Martin, Corteva, Bristol-Myers Squibb and Berkshire Hathaway.
Past performance is not a guarantee of future results with this ASX share. But the MOAT ETF has done well following the above-mentioned investment strategy. Net returns have been an average of 18.9% over the last five years, after fees.
Xero Limited (ASX: XRO)
Xero is, in my opinion, one of the highest-quality ASX shares.
But the short-term performance has certainly not been enjoyable. The 2022 year-to-date performance has seen a decline of around 30% for the Xero share price. Ouch.
I think volatility like this gives us the opportunity to buy into great businesses at much better value. Xero will likely keep growing revenue and investing for more growth whether the Xero share price is $150 or $100.
The cloud accounting software provider is winning over a global subscriber base (3 million and counting), particularly in places like Australia and the UK. It doesn’t need to win in every single market (like the US), it just needs to steadily keep growing its software offering to keep winning big in newer places like Canada, South Africa and Singapore.
One of the best advantages about Xero is its incredibly higher gross profit margin, which was 87.1% in the first half of FY22. This means a lot of the ASX share’s new revenue can turn into gross profit, allowing it to re-invest heavily for more long-term growth.
Xero’s annualised monthly recurring revenue continues to rise. It was $1.13 billion at the last disclosed count. There’s a very profitable tech business underneath the vast amount of growth expenditure that’s going on right now. Don’t let the low profitability and cash flow fool you.
In the future, I think Xero can become one of the biggest ASX shares over time. But today’s lower price represents an opportunistic time to jump in.
