One of the most compelling ASX-listed exchange-traded funds (ETFs) that Aussies can buy, in my view, is one that can provide great returns, diversification and relatively low fees. The Global X S&P World EX Australia GARP ETF (ASX: GARP) is one that really ticks the boxes for me.
The fund aims to provide investors with access to global companies with strong earnings growth, solid financial strength and trading at reasonable valuations.
It's that combination of things that gives the investment strategy its name – growth at a reasonable price (GARP). I think it's no mistake that the index this fund tracks has returned an average of 20.6% per year over the last five years.
I believe this ASX ETF is well-positioned to perform strongly in the coming years due to four key factors.
Businesses that are growing at a pleasing pace give themselves a very good chance of creating good returns for shareholders because of the power of compounding.
This fund is full of businesses growing quickly. There are two elements that the fund is looking at.
It looks at the growth rate of sales over three years.
It also looks at the growth rate of earnings per share (EPS) over three years.
If the businesses are growing sales and EPS at a good pace, it suggests the stocks are going in the right direction.
There are a variety of ways to judge the quality of a business. For this ASX ETF of 250 names, to be judged as quality, there are two characteristics the businesses in this portfolio have.
First, they should have low financial leverage, meaning low debt levels.
Second, the businesses should have a good return on equity (ROE). This means they make a high level of profit for the level of shareholder money retained within the business. A high ROE is appealing because it means shareholders don't need keep a lot of money within the business for it to make good profits or grow.
A high ROE suggests good earnings returns for any additional money invested in the business.
Investing in good businesses at a reasonable valuation could be key for generating strong returns. Investing in expensive businesses may not yield superior results.
How does the GARP ETF identify good value?
The ASX ETF looks at the earnings to price ratio, which is an alternative way of calculating the price/earnings (P/E) ratio.
A lot of investment work goes into the creation of this portfolio, yet the fees are very reasonable, in my opinion.
The GARP ETF has an annual management fee of just 0.3%, which is a lot less than what many active fund managers may charge. This is great because it leaves more of the investment returns in the hands of investors.
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