This period of higher inflation and interest rates brings plenty of uncertainty. I think two ASX ETFs can help bring certainty.
Particular exchange-traded funds (ETFs) are a great place to invest for investors who want both diversification and potentially good returns.
In my view, the global share market is becoming increasingly focused on tech, particularly AI. That’s understandable, but I think investors need to pay attention to a few factors with their investments.
VanEck MSCI International Quality ETF (ASX: QUAL)
The QUAL ETF is about investing in some of the world’s highest-quality businesses.
In my view, it’s the businesses that continue to be strongly profitable and have good balance sheets that will be able to perform, regardless of what happens with macroeconomic factors.
The QUAL ETF tries to only invest in the best quality businesses across the world. It does so by having a set of criteria to be included. Its portfolio is full of names like Microsoft, Apple, Meta Platforms, Nvidia, Visa and ASML.
First, the business must have a high return on equity (ROE). That means they’re making a lot of profit for how much shareholder money (equity) is invested in the business. The higher the ROE, the more profitable that company is for $1 invested in the business.
Typically, businesses with higher ROEs have delivered significant shareholder returns and that could continue if those businesses continue to invest new dollars and deliver high ROE with those extra dollars.
Second, the business must have earnings stability. If profits are stable, then earnings can steadily climb over time.
Third, the balance sheet’s debt levels must look healthy. The healthier the better.
Over the last five years, it has returned an average return per year of 12.2%, despite the volatility of the global stock market.
Betashares Global Quality Leaders ETF (ASX: QLTY)
The other ETF I want to highlight is another quality-focused fund.
The QLTY ETF operates in a similar sort of way – it looks four businesses that tick the box.
It wants to see a high ROE, low debt levels, stable earnings and good cashflow generation.
As I mentioned above with the QUAL ETF, the combination of a good ROE, balance sheet and earnings stability is a winner. Adding the additional characteristic of good cashflow generation means these businesses see actual cash, not necessarily just accounting profits – I think it’s a good extra safeguard to ensure the right businesses are added to portfolios.
Since inception in November 2018, it has returned an average of 13.8%. In some ways, I like this ETF more because of its inclusion of cashflow as a factor to consider.
