Exchange-traded funds (ETFs) are a great way to invest in the share market without being too exposed to one particular business (or sector).
I like how ETFs can give instant diversification because they own a portfolio, or a basket, of shares.
Most ETFs are different to one another – some invest in ASX shares, some invest in international shares and some don’t invest in shares at all – some give exposure to credit, property, gold and so on.
I’m going to highlight two ETFs that have exciting portfolios.
VanEck Morningstar International Wide Moat ETF (ASX: GOAT)
I’m an investor in this ETF because of the global exposure and the way its portfolio is focused on quality.
It aims to invest in a diversified portfolio of attractively priced international companies that have a wide moat, or sustainable competitive advantages that are expected to last for 20 years (or more). It currently has 66 holdings, which I think is plenty.
Only owning businesses that are expected to make good profits for a very long time seems like a good strategy to me, particularly when the outlook has become cloudier with geopolitical events, AI, inflation and so on.
The GOAT ETF only invests in these strong moat businesses when they’re trading at an attractive value compared to Morningstar’s estimate of fair value.
This strategy has delivered an average return per year of around 12.8% over the past decade. It’s something I’m very willing to own for many years.
Betashares Global Quality Leaders ETF (ASX: QLTY)
This QLTY ETF is about owning the highest-quality businesses in the world. It doesn’t have a focus on the valuation. Though, that’s not necessarily a bad thing – great businesses don’t typically trade at discounted prices.
There are four aspects that this fund uses to choose what to invest in.
First, they must have a high return on equity (ROE). That means they must be highly profitable for how much shareholder money they have retained.
Second, they must have a low debt to capital. Their balance sheets must be healthy and their profits should not be juiced by debt.
Third, they should have cashflow generation ability. Cashflow is arguably even more important than profit generation.
Fourth, these businesses should have earnings stability. Stable and rising profits are a key feature of what investors want to see in terms of business progress. Why would a valuation sustainably increase if the profit isn’t increasing?
It owns 150 of these high-quality businesses including Applied Materials, Lam Research, ASML, Johnson & Johnson and Costco.
The strategy this index tracks has delivered an average return per year of 14.1% over the past decade.
I’m optimistic the QLTY ETF can continue to deliver good returns over the long-term.
