Are you interested in learning how to create a core-satellite portfolio using ETFs?

Investing in ETFs is one of the easiest and most cost-effective ways to create a diversified portfolio that matches your risk tolerance and investment goals. 

With the right combination of ETFs, you can create a core-satellite portfolio, using the simple core-satellite approach to build a personalized portfolio that matches your risk tolerance. In this article, we'll take you through a few simple steps to create a core-satellite portfolio using ETFs.

What is a core-satellite portfolio? 

A core-satellite portfolio is an investment strategy that combines passive and active investments to achieve diversification, cost efficiency and the potential for higher returns. 

Unlike traditional passive investment approaches, it gives you a bit more discretion to include riskier investments with high idiosyncratic risk factors, such as individual small-cap stocks, in your portfolio without compromising on excessive risk.

It works in the following way:

The core of the portfolio consists of passive investments such as index funds, exchange-traded funds (ETFs) and passive mutual funds that track major market indices. It's called "core" because it's the heart of the portfolio, which isn't traded or rebalanced. With these core investments, you can choose to track equity indices and bonds, essentially replicating a 60-40 portfolio allocation style. The core, as the name suggests, should be the foundation of the portfolio and make up at least 50 per cent or more of the portfolio. It's the 'boring' part. 

The satellite part of the portfolio consists of actively managed investments such as individual high-beta stocks, high-yield bond funds, and growth sector stocks such as biotech, technology, and commodities. The idea here is that you can pick and choose the risks you’d like to take actively.

These satellite investments are typically high beta and aim to outperform their benchmarks over time. Satellite investments also help provide additional diversification and limit overall volatility, as they are often low or negatively correlated with the broader market. Think of risky "stonks" or bets on stocks with high short interest.

Advantages of a core-satellite portfolio

The core-satellite portfolio combines the stability and low fees of passive investments, such as index funds and exchange-traded funds (ETFs), with the potential for higher returns through the active management of satellite investments.

  • Cost-control

A key benefit of the core-satellite approach is cost control. By allocating the majority of the portfolio to low-cost passive investments, you can minimise overall expenses while still benefiting from the potential outperformance of actively managed satellite investments. Over time, these reduced costs can translate into higher returns for investors.

  • Potential for outperformance

Another benefit of this strategy is the potential for outperformance. The actively managed satellite investments offer investors the opportunity to take advantage of market trends and generate higher returns than the broader equity market. This combination of passive and active investments allows investors to potentially outperform the market while maintaining a well-diversified portfolio.

  • Lower volatility

The core-satellite approach also helps to limit the volatility of the investment portfolio. By allocating a large portion of the portfolio to passive investments, the overall risk profile remains relatively stable. In addition, the inclusion of non-correlated assets, such as commodities, can further reduce overall volatility during periods of market turbulence.

  • Tailored to individual style

The core-satellite approach allows you to tailor your satellite holdings to your particular investment style, to take advantage of current market conditions or personal preferences. For example, you could try to identify suitable investments for the satellite portion by combining fundamental analysis with the sentiment analysis offered by

How to construct a core-satellite portfolio using ETFs

As with any portfolio construction, you need to follow some basic principles before selecting individual investments for your core-satellite portfolio:

1. Determine your risk profile and strategic asset allocation

Before building your portfolio, you should assess your risk tolerance and financial objectives. This will help you decide on the appropriate asset allocation for your core and satellite investments. It's best to consult a financial adviser or online financial adviser, such as a robo-adviser, who will guide you through a questionnaire focusing on your time horizon and other factors that determine your risk tolerance.

2. Choose the investments for the core

Once you've defined your risk profile, you can choose the core of your portfolio. Depending on your risk tolerance, this will determine the weighting of stocks versus bonds and other investments. The core should consist of low-cost, diversified, index-tracking ETFs that provide broad market exposure and serve as the foundation of your portfolio. For example, you could use a global equity ETF and a global bond ETF hedged to your home currency as your core holdings, with perhaps some gold or commodity ETFs added. Each option will naturally come with its pros and cons just like any potential investment. 

3. Determine the size of the core versus the satellite in each asset class

The core portion of your portfolio can range from 50 to 90 per cent, depending on your risk tolerance and financial objectives. The remaining percentage is allocated to satellite investments.

4. Select the satellite investments

Satellite investments are actively managed, riskier investments such as individual stocks or specialised ETFs that aim to outperform the market. These investments offer opportunities for higher returns and diversification. You're pretty much free to do as you please and add your own personal style to your investment approach. You can learn more about various ETFs like VUSA, VWRL and ACWI on our website. 

5. Monitor and rebalance your portfolio

Once you have made your initial allocation, you should regularly review your portfolio to ensure that it remains in line with your financial goals and risk tolerance. In practice, this means mainly style managing the satellite investments in your portfolio, which could even involve active trading. As for the core, rebalancing would be infrequent and would basically occur mainly as you get older and the portfolio hopefully gets bigger.

To sum up, a core-satellite approach to portfolio construction is favoured by many more active investors because it allows them to pick individual investments and make "bets" without compromising the risk portion of the portfolio.

By following our steps, you can build a core-satellite portfolio using ETFs that combine the benefits of passive and active investment strategies. This approach allows you to gain broad market exposure while seeking higher returns through specialised investments, ultimately creating a diversified and cost-effective investment portfolio tailored to your needs.