I'm a fan of ASX-listed exchange-traded funds (ETFs) that can deliver capital growth. After all, that's what helps compound our wealth to much larger numbers over the years.
Companies that reinvest profit back into business growth can achieve great long-term success. So, it can be helpful if a business decides on a lower dividend payout ratio, as that can lead to more profit growth over time.
And profit generation typically plays an important part in the market valuation, so a rising profit is likely to lead to a rising share price over time.
I believe Aussies would benefit from having a significant part of their portfolio invested in global shares because that's where many high-quality, strong compounding businesses can be found.
Later, we'll look at some of my favourite ASX ETFs that I'd buy for capital growth to reach $1 million. But first…
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How much difference can growth make?
We can't ever know for sure what the future holds, and past returns are not a guarantee of future returns.
However, in the technology sector, I think the global share market can be more compelling than the ASX because there are many exciting, large, growing tech stocks there.
To illustrate, the Vanguard Australian Shares Index ETF (ASX: VAS) has returned an average of 8% per annum over the past decade.
Since its inception in November 2014, the Vanguard MSCI Index International Shares ETF (ASX: VGS) has returned an average of 13.2%.
Now, imagine we'd invested $50,000 10 years ago.
Over ten years, growing at 8% per annum, that $50,000 invested in VAS would become $107,946.
Meanwhile, $50,000, growing at 13.2% per annum, would become $172,756. That's an extra 60% return in percentage terms for someone's wealth.
Of course, the global share market may not perform as well in the next decade. However, falling interest rates could help boost returns in the next few years.
Which ASX ETFs I'd buy to help build towards $1 million
I really like the VGS ETF because of its broad exposure to the global share market. But, there are other ASX ETFs I like even more.
I'll say again that past performance is not a reliable indicator of future performance, but I think the way the portfolios below are constructed is compelling and could enable the long-term outperformance of the ASX share market.
VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT) invests in US companies that have strong and very durable economic moats/competitive advantages. It only invests in stocks when the valuation is cheaper than what analysts think those businesses are worth. Over the past five years, it has returned an average of 15.4% per annum.
Betashares Global Quality Leaders ETF (ASX: QLTY) invests in a global portfolio of 150 names that rank well on four key metrics: return on equity (ROE), the debt-to-capital ratio, cash flow generation and earnings stability. That combination has led to this ASX ETF returning an average of 14.2% per annum over the last five years.
iShares Global 100 ETF (ASX: IOO) invests in a portfolio of 100 of the largest businesses in the world, including in the United States, the United Kingdom, Switzerland, France, Japan and so on. The biggest businesses can continue to grow their strength and profit further. In the last five years, the IOO ETF has returned an average of 16.5% per annum.
I think each of these quality ASX ETFs has the potential to help an investor's portfolio grow towards $1 million in value.
