Why this exciting pick was my latest ASX ETF buy

This ETF could provide me with the right mixture of diversification and returns.

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I'm always on the lookout for investments that could improve my portfolio, so I recently invested in a leading ASX exchange-traded fund (ETF) – the VanEck MSCI International Quality ETF (ASX: QUAL).

I'd say my portfolio is quite well diversified across industries and different-sized businesses, but it's focused on ASX shares. There are lots of opportunities outside of Australia in countries like the US, the UK, Japan and so on that I wasn't getting exposure to.

If I only invest in ASX shares, I could miss out on some of the best international companies.

By investing in the QUAL ETF, I believe I'm improving my diversification without necessarily hurting the potential returns. Sometimes, owning an increasing number of investments in our portfolio can lower returns towards the market's average return.

Let's dive into why I think this ASX ETF can help me.

Substantial diversification

This ASX ETF owns approximately 300 shares, which I think is plenty. That's 100 more than the S&P/ASX 200 Index (ASX: XJO).

While just over three-quarters of the fund's allocation is to the US, numerous countries have a weighting of more than 0.5%, including Switzerland, the UK, Japan, Denmark, the Netherlands, France, Sweden, Ireland, Canada, and Germany. I don't have much exposure to non-ASX shares, so all of this geographic diversification benefits me.

I also like the spread of sector exposure, with the growth-focused IT sector getting a 29.4% allocation and four other industries having a double-digit weighting – healthcare (17.7%), industrials (13.1%), communication services (12%) and financials (10.2%).

Potential for strong returns

The way this ASX ETF is set up means that every holding is high-quality and a contender for good returns.

There are three key factors this fund looks for when picking the stocks for its portfolio: a high return on equity (ROE), earnings stability and low financial leverage.

That means the business makes a high level of profit for the amount of retained shareholder money within the business, the profit doesn't usually decline, and the balance sheet has a low level of debt for its size. When you combine those elements, you're left with great businesses.

Past performance is not a guarantee of future performance, but in the past five years, the QUAL ETF has returned an average of 15.7% per year, outperforming the global share market by more than 2% per year.

I believe this ASX ETF can continue to outperform the ASX share market and the global share market in the next decade. It will also provide good diversification for my portfolio and work well with my other ASX share holdings.

Motley Fool contributor Tristan Harrison has positions in VanEck Msci International Quality ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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