Exchange-traded funds (ETFs) can be an effective way to invest in shares and also get diversification.
There are some ETFs that are based on an index, like the S&P/ASX 300 Index (ASX: XKO), which is tracked by the Vanguard Australian Shares Index ETF (ASX: VAS).
However, there are other ETFs that have portfolios selected through a series of rules based on quality, ethical, or other factors.
The following two ETFs have been rated as buys on a recent Livewire episode of 'buy hold sell':
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BetaShares Global Sustainability Leaders ETF (ASX: ETHI)
The ETHI ETF has been rated as a buy by both Felicity Thomas from Shaw and Partners and Ben Nash from Pivot Wealth.
Thomas said that it is one of her favourite ETFs, partly thanks to the positive carbon screening.
Nash also likes the positive screening, noting sustainable investing is getting "more and more attention" with more fund inflows. The companies involved can benefit from the decrease in the cost of capital and this could help them perform better over the long term.
BetaShares explains that companies are selected from global 'developed' markets and they must meet market capitalisation and liquidity requirements. Next, companies must be in the top one-third of performers in terms of their carbon efficiency or engaged in activities that can help reduce carbon use by other industries.
Finally, a number of exclusions are then applied to the remaining businesses. For example, no fossil fuel producers; no companies significantly engaged in services like gambling, alcohol, or junk food; no companies with human rights or supply chain issues; and so on.
Some of the 200 businesses in the portfolio include Nvidia, Visa, Home Depot, Mastercard, Toyota, ASML, Cisco Systems, UnitedHealth, and Adobe.
There are four sectors that have a weighting of more than 10%: IT (with a 40.5% weighting), healthcare (17.2%), financials (15.4%,) and consumer discretionary (13.1%).
VanEck MSCI International Quality ETF (ASX: QUAL)
This is an ETF that is provided by VanEck, which has a focus on quality international businesses. It's rated as a buy by Felicity Thomas because of its exposure to quality companies with "high revenue growth and a solid balance sheet".
VanEck says this ETF is about accessing the world's highest quality companies based on key fundamentals including a high return on equity, earnings stability, and low financial leverage.
The ETF provider also points to its "outperformance potential". It noted that "investments focused on companies with quality characteristics have delivered outperformance over the long term relative to global equity benchmarks".
It was invested in around 300 names at the end of March 2022. Its biggest positions at the end of the last month were: Apple, Microsoft, Nvidia, Meta Platforms, Johnson & Johnson, Alphabet, UnitedHealth, Visa, and ASML.
The QUAL ETF has outperformed the MSCI World ex Australia Index by an average of more than 3% per annum over the past five years, though past performance is not a reliable indicator of future performance. It has an annual management fee of 0.40%.
