Why I think this ASX ETF is a top pick for global diversification

The exchange-traded fund (ETF) Betashares Global Quality Leaders ETF (ASX: QLTY) could be one of the most effective ways to get more exposure to international shares.

Australian is a great country, but it only represents a small part of the global economy.

I think investors would do well by adding some international diversification to their portfolios. Certainly, there are some very good businesses listed outside of the ASX.

But we can still get exposure to those names through the ASX with good ETFs.

I like options such as the Vanguard MSCI Index International Shares ETF (ASX: VGS) and Vanguard All-World ex-US Shares Index ETF (ASX: VEU). Yet there are a lot of businesses in those portfolios that I’d be happy enough not to own.

If we just focused on the strong businesses, the Betashares Global Quality Leaders option could produce good returns.

Betashares Global Quality Leaders ETF

The idea with this ASX ETF is that it owns 150 global companies outside of Australia, ranked by the highest quality score.

There are four quality score rankings that are combined and used to select the businesses that go into the portfolio – return on equity (ROE), debt to capital, cash flow generation ability, and earnings stability.

In other words, the businesses make good profits for shareholders, have low debt, and see the profit come through in the form of good cash flow.

As examples of the types of businesses that it’s invested in, these were the biggest six positions at the time of writing: Novartis, Meta Platforms, L’Oreal, Alphabet, Novo Nordisk, and Microsoft.

One of the things that I like about this ETF is that it’s invested heavily in sectors that could have good growth potential, with small weightings to low-growth areas.

At the last disclosure, for March 2023, the IT weighting was 32.6%, the healthcare weighting was 21.4%, and the industrials weighting was 14.2%. Meanwhile, materials was only 4.5%, financials was 3.1%, and energy was 3.1%. Certainly, these sectors typically earn lower returns on their assets.  

Better returns

Past performance is not a guarantee of future returns, but the ASX ETF has outperformed the Vanguard MSCI Index International Shares ETF over the long term. I think this is a sign that the ‘quality’ way of investing can be very effective. But it’s unlikely to outperform every single year.

Betashares Global Quality Leaders ETF returned an average of 10.45% per annum over the three years to 31 March 2023. The Vanguard MSCI International Shares Index ETF returned an average of 8.34% over the same three-year period.

The index that the Betashares Global Quality Leaders ETF tracks has returned an average of 12.9% per annum over the prior five years. I’m using the index data because the ETF itself isn’t five years old yet. The Vanguard MSCI Index International Shares ETF returned an average of 10.15% per annum in the prior five years.

Time will tell which ASX ETF performs better over the next three or five years, but I believe the Betashares Global Quality Leaders ETF will be able to achieve good returns.

The post Why I think this ASX ETF is a top pick for global diversification appeared first on The Motley Fool Australia.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Meta Platforms, and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Novo Nordisk. The Motley Fool Australia has recommended Alphabet and Meta Platforms. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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