ETF Spotlight: Finding quality exposure to global equities
Worried about the AI bubble? Stretched valuations? Increasing market concentration? This ETF may be the answer.
Mentioned: Vaneck Msci International Quality Etf (QUAL)
Welcome to ETF Spotlight.
This is a monthly series that takes a closer look at ETFs to translate complexity into practical insights for investors looking at new funds. This week I’ll be looking at VanEck’s MSCI International Quality ETF ASX: QUAL.
What is a quality ETF?
Academics have long theorised that there are a set of characteristics or ‘factors’ that help explain outperformance. These include things like the size of a company, its current valuation and relative quality (denoted by common metrics e.g. level of debt). Factor investing is an investment approach that involves focusing on certain drivers of returns across asset classes.
A quality ETF generally aims to invest in companies with stable earnings, robust financial positions and higher profit margins. However, the way a fund implements quality can vary widely.
Why now?
Quality has long been a favourite among Aussie investors looking for global equity exposure. QUAL ETF in particular has become the go-to option and in 2025 it was the second most held ETF in SMSFs, sitting just behind Vanguard’s Australian Shares ETF VAS.
Now more than ever, markets are noisy and investor emotions are heightened. Stretched valuations have increased the risk of a sustained pull back and created a sense of unease with investors feeling the familiar urge to act.
In response, some commentators are calling for a rotation into quality as a method to stay invested whilst tilting toward profitable and financial resilient companies amid concerns about increasing mega-cap concentration.
The father of value investing, Benjamin Graham, argued in his book The Intelligent Investor that quality companies showed resilience during downturns and would recover to previous highs quicker than others, thus leading to outperformance.
Vaneck Msci International Quality Etf QUAL
Methodology and composition
The fund tracks the MSCI World ex Australia Quality Index through a full replication approach. That means that it physically holds all the underlying securities of its target index in the exact same proportions.
The benchmark is based on parent index MSCI World ex Australia, which features large and mid-cap stocks across 22 developed countries. The parent index is notably tracked by another popular investor pick: Vanguard’s MSCI Index International Shares ETF (VGS).
The fund strategy aims to capture high-quality growth stocks by screening the parent index on three variables: high return on equity, stable earnings growth, and low financial leverage. The top 300 ranked securities are chosen from the parent index pool which comprises ~1,200 names. No country or sector constraints are implemented in the quality index, although a 5% limit is imposed for individual holdings.
Index-tracking factor ETFs are sometimes referred to as ‘passive outliers’, because they aim to replicate an underlying benchmark, but also overlay a rules-based selection process to determine which companies best reflect relevant factors. One could say passive outliers aim to capture the best of both worlds. With that in mind, QUAL carries a 0.40% management fee which means is significantly cheaper than the average active strategy and around double the price of its ‘truly passive’ counterpart VGS ETF which lacks the quality overlay.
The resulting portfolio shows a notable difference to its parent index, the MSCI World ex Australia. Tech (30%) and healthcare (17%) dominate while financials are underweight because their leveraged balance sheets don’t often make it past the quality overlay. This might provide sensible diversification for an Australian investor given our domestic market is dominated by financials and materials.
Source: Morningstar. 2026. ‘Investment’ refers to QUAL ETF.
Medalist Rating
We ascribe a Morningstar Medalist Rating of Bronze indicating that we believe this ETF can deliver positive alpha relative to its category benchmark.
The turnover detail
Fund turnover shows how much a fund’s holdings have changed over the course of the year. Even though QUAL’s underlying index only rebalances semi‑annually, its turnover in the last 12 months was 18.2%, compared with just 2.3% for the parent MSCI World ex Australia Index. This is quite a common occurrence for factor ETFs.
Source: MSCI. Latest disclosure. 2026.
The parent index is market-cap weighted, so it changes very little at each rebalance. QUAL on the other hand is a rules-based selection strategy where a company’s fundamentals shift more frequently than market-cap eligibility. The result is that the fund must trade more to maintain its quality exposure. Furthermore, QUAL also puts a 5% cap on individual holdings. When strong performers breach the cap, the index must trim them back at the rebalance and reallocate weight to other holdings. This adds another layer of trading that the parent index doesn’t have to deal with.
Why should we care about turnover?
Research from the Morningstar US team found that ETFs (passive and active) that traded the least typically showed better performance by a long shot. Those with the lowest turnover outperformed their average Morningstar Category peers by an average of ~2% annualised over the three years to March 2025.
Funds that trade the most also tended to come with higher fees and likely the highest trading costs. Both factors also weigh on returns. In saying that, QUAL wins the performance race over the trailing 10-year period but did notably underperform its category index over the last 12 months (2.4% vs 6.5%).
Whilst QUAL’s turnover is certainly higher than the MSCI parent index, it is still relatively low compared to the average active strategy.
Higher turnover in a portfolio also introduces other implications such a higher likelihood of capital gains being realised in the short-term and thus passed onto the investor. More on fund turnover here.
Who is this fund best suited to?
Investors may turn to quality funds for very different reasons because the label is somewhat vague and ill-defined but still sounds positive. Some may seek outperformance and use it to express a conviction that the quality factor will continue to reward long-term investors. Others may be close to drawing down on their portfolios and quality can appear to offer a lower-volatility, capital-preserving approach to global equities. But do these things hold up in practise?
Conventional wisdom stipulates that high quality companies fall less during downturns and rise less during stronger periods of market growth. Some investors reach for quality funds because they believe it might provide a defensive element to global equity exposure.
The downside capture ratio measures performance in down-markets relative to the index. A value of less than 100 indicates that an investment has lost less than its benchmark when the benchmark has been in the red.
The graphic below shows the 10-year market volatility measures for QUAL. We can observe that the fund hasn’t quite cushioned losses during downturns. With a ratio of 108, it has historically fallen slightly more than the market during selloffs. If an investor’s goal is to specifically reduce drawdowns, it appears that QUAL hasn’t been able to deliver that outcome.
On the other hand, an upside capture ratio measures performance in up-markets relative to the index. A value over 100 indicates that an investment has outperformed the benchmark during periods of positive returns for the benchmark. We see that QUAL’s upside capture ratio of 110 shows it tends to outperform in rising markets.
Investors who view quality as a defensive factor may need to re-calibrate their expectations as it appears QUAL amplifies upside more than it protects on the downside.
Source: Morningstar. 2026.
QUAL has a strong record and has outperformed its average peer and category benchmark over the last decade.
Source: Morningstar. 2026.
Stocks with quality traits are expected to be more resilient during distressed markets and high-volatility conditions. During the February to March period in 2020, both the broader market and the average category peer declined by 8.0% and 13.0% respectively whilst QUAL lost just 2.5%. However, the same resilience as not observed in 2022, particularly due to the heavy concentration in the tech sector.
Risk profile
Investing is ultimately an exercise of balancing risk and reward. A goals-based investing approach requires understanding whether an ETF’s inherent risk aligns with the outcomes you’re targeting. During the portfolio construction process, your risk tolerance should provide a framework for how much quantitative investment risk sits within your boundaries.
It’s also important to distinguish between risk tolerance and risk capacity. Risk capacity reflects objective factors e.g. your financial position, investment horizon, returns you need to achieve your goals and personal circumstances. On the other hand, risk tolerance is a subjective measure of how much volatility you can emotionally withstand in pursuit of higher returns.
Standard deviation is often used as a measure for volatility. It calculates how widely returns have varied around their historical average. A higher standard deviation means the historic range of performance is wide and therefore the investment is expected to have greater volatility in the future. For many investors, the amount of volatility they can stomach is the practical definition of risk tolerance.
So how much risk tolerance do you need to own QUAL?
QUAL has exhibited meaningful volatility with a 10-year standard deviation of 11.93%, which was higher than its category average. To put that in context, QUAL’s 10-year trailing annualised return of 14.78% implies that annual returns have fallen somewhere roughly between –9% and +39% about 95% of the time.
This range is not uncommon for global equities and long-term growth investors should expect and be prepared for this level of variability. Over a 20-year period, QUAL’s underlying index has typically experienced three to four negative years.
But investors don’t accept volatility without a reward. Experiencing sharp swings in an investment can be uncomfortable and may trigger poor decisions such as panic selling. Although, if you have a longer time horizon, volatility isn’t something you should necessarily worry about. The more meaningful question isn’t simply how volatile an investment is, but whether that volatility if working to achieve your goals.
Are you being compensated with stronger returns for the higher volatility you’re taking on? We refer to the notion of risk-adjusted returns, measured by the Sharpe ratio. This ratio is calculated by subtracting the safe market return from the expected return of an investment and then divides that by the standard deviation. A ‘good’ Sharpe ratio is generally considered to be 1.0 or higher, as it indicates the investment provides sufficient returns for the risk taken.
Over the past decade, QUAL delivered a Sharpe ratio of 1.05, which is higher than the category (Australia Fund Equity World Large Blend) average of 0.88. In simple terms, this means the volatility investors have endured with QUAL has been rewarded by the return.
Source: Morningstar. 2026.
We can also look at a fund’s target market determination to get a better idea of the attributes a potential investor needs to have to own the fund. VanEck states the product is likely to be appropriate for a consumer who:
- is seeking capital growth;
- is intending to use the product as a major, core, minor or satellite allocation within a portfolio;
- has an investment timeframe of at least 5 years;
- has a high risk/return profile; and
- is seeking withdrawal proceeds to be typically paid within a week of request.
Final thoughts
Moving away from the technicality of a target market determination, on a more granular level this fund suits investors looking for broad international exposure but has a preference for companies with stronger balance sheets and more consistent profitability. Investors also have to be comfortable with a more concentrated, rules-based approach compared to a traditional market-cap based index.
There are a couple trade-offs when we compare QUAL to broader, global market index ETFs. These include higher fees, higher turnover and a portfolio that is slightly less diversified than its parent index due to the quality screen. These are some of the costs I’d define for those who want to move beyond vanilla exposure.
Investors should also remember that making the move from broad based ETFs to single-factor or multifactor funds is far from a free lunch. Factor strategies will always look compelling in backtests so investors should be cautious about assuming historical drivers of return will persist.
Still for investors who feel that simply matching the market isn’t enough to meet their goals, QUAL offers an interesting middle ground. It avoids the usual drawbacks of traditional active management (higher fees, manager risk), while tilting towards a characteristic that has been linked to long-term outperformance.
