Beating both the FTSE 100 and the MSCI World indexes over the long term isn’t easy. But history shows that it is possible.
Here, I’m going to highlight two exchange-traded funds (ETFs) that have beaten both of these major indexes over the last five years. I reckon they have a good chance of outperforming these indexes over the next decade, and are worth considering as part of a diversified portfolio.
High-quality stocks tend to outperform
First up we have the iShares Edge MSCI World Quality Factor UCITS ETF (LSE: IWQU). This is a global tracker fund that focuses on high-quality companies within the market (those with a high return on equity, low debt, and low earnings variability).
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I’m a big fan of ‘quality investing’ and the performance of this product illustrates why. Over the five-year period to the end of August, it returned 91.3% in US dollar terms versus a return of 85.8% for the regular iShares Core MSCI World UCITS ETF and 38.8% for the iShares Core FTSE 100 UCITS ETF (in GBP terms). In other words, it smashed the Footsie and outperformed the standard global ETF by about 1% a year.
It’s worth noting that with this ETF, investors still get exposure to most of the big names in the stock market. At the end of August, the top five holdings were Nvidia, Apple, Microsoft, Meta Platforms, and Visa. Personally, I’ve invested directly in four out of those five companies because I believe they’re long-term winners that’ll outperform the market.
Now, a quality investing strategy isn’t going to outperform all the time. There will always be times where lower-quality stocks (cyclicals) have a period of strength.
Given that studies show that high-quality stocks tend to beat the market over time however, I reckon there’s a good chance it will deliver superior returns in the long run.
The AI revolution is just getting started
The other ETF I want to highlight is the L&G Artificial Intelligence UCITS ETF (LSE: AIAG). This is a product from Legal & General that’s focused on artificial intelligence (AI) stocks.
AI’s a huge theme today (and one I’m very bullish on) and this is reflected in this ETF’s recent performance figures. In US dollar terms, it gained 102.8% for the five-year period to the end of August. That’s significantly higher than the returns from the FTSE 100 and MSCI World indexes.
Given that the AI industry’s forecast to grow by around 30% a year between now and 2030, I believe there’s a good chance this product will continue to do well going forward. As always though, nothing’s guaranteed in the stock market.
This ETF’s higher-risk (Legal & General rates it a 7 out of 7 in terms of risk). That’s because it mainly owns tech stocks and these can be volatile at times. At the end of August, the top five holdings were Samsara, Palo Alto Networks, Cloudflare, ServiceNow, and Autodesk (Nvidia and Microsoft were in the top 10).
Taking a long-term view though, I think this ETF has the potential to deliver blockbuster gains.
