The VanEck MSCI International Quality ETF (ASX: QUAL) looks like a high-quality ASX exchange-traded fund (ETF) that could make a good addition to my portfolio.
For readers that don't know what this investment is, it owns a portfolio of 'quality' international companies that are listed on markets around the world outside of Australia. It has an annual management fee of 0.40%.
There are a few different reasons why I like the investment, which I'll talk about.
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Diversification
I think that diversification is one of the most useful tools for investors, if done in the right way. I wouldn't want to add diversification just for the sake of it if that materially lessened returns. But I like the idea of spreading the risk across more businesses and sectors if it doesn't reduce returns.
ASX shares are great, but they only represent 2% of the global share market. There are thousands of other companies out there that may be worth owning and can provide something different to what's already in my portfolio.
When I look at the sector allocation within the ASX ETF, just over half is invested in IT/technology and healthcare companies. I like these two sectors because they normally have a good, non-cyclical earnings growth profile.
Low debt
One of the factors that a company needs to score well on to get into the portfolio is that it needs to have a low debt-to-equity ratio. That doesn't necessarily mean it's automatically going to be a success though.
However, there has been a significantly large increase of interest rates in Australia and the US over the last couple of years.
For companies with lots of cash on the balance sheet, it should translate into a pleasing boost to net profit thanks to interest income.
However, businesses with a large amount of debt means that they will need to pay a lot more in interest expense to lenders. It could be a significant drag on profitability, and for some businesses, it may be fatal.
The businesses in this ASX ETF's portfolio are meant to have a relatively small amount of debt for how large they are.
Strong companies
Not only do these businesses have a good balance sheet, but they must also rank well on the return on equity (ROE) metric and earnings stability.
In other words, they need to generate a good amount of profit for how much shareholder money is retained in the business, and the profit needs to be relatively stable (and hopefully deliver good growth) compared to the wider market.
Some of the current businesses in the portfolio include Nvidia, Microsoft, Apple, Meta Platforms, Eli Lilly, Visa and Novo Nordisk.
Past performance is not a guarantee of future performance, but since the ETF's inception in October 2014, it has delivered an average return per annum of 14.8%, which I think is solid.
I like owning strong companies in my portfolio.
