Core-satellite investing is a portfolio construction strategy that combines the best of passive and active investing. The approach uses low-cost index funds as the foundation while adding targeted investments around the edges to pursue higher returns or specific goals.
What is Core-Satellite Investing?
The strategy divides your portfolio into two parts:
- Core (60-80% of portfolio): Broad market index funds that provide diversified, low-cost market exposure
- Satellites (20-40% of portfolio): Targeted investments aimed at outperformance or specific strategies
The key insight: You get the reliability and low costs of index investing for most of your money, while still having room to pursue higher returns with a smaller portion of your portfolio.
Why Use Core-Satellite?
This approach offers several advantages over purely passive or purely active strategies:
Benefits of the Strategy
- Cost efficiency: Most assets are in low-fee index funds
- Diversification: Core holdings provide broad market exposure
- Flexibility: Satellites allow for tactical opportunities
- Risk management: Limited exposure to active strategies that might underperform
- Potential for outperformance: Satellites can boost returns if chosen well
Who Should Consider It?
- Investors who believe in indexing but want some active exposure
- Those with strong convictions about specific sectors or themes
- Experienced investors who can identify opportunities
- Anyone wanting to balance simplicity with customization
Building the Core
Your core holdings should be broadly diversified, low-cost index funds:
Core Options
- Total US Stock Market Fund: Covers all US stocks in one fund
- S&P 500 Index Fund: 500 largest US companies
- Total International Stock Fund: Non-US developed and emerging markets
- Total Bond Market Fund: Broad bond market exposure
Sample Core Allocation
- 40% US Total Stock Market
- 20% International Stocks
- 20% US Total Bond Market
Core Selection Criteria
- Expense ratios below 0.10%
- Broad market coverage
- High liquidity and trading volume
- Established fund with track record
Choosing Your Satellites
Satellites are where you can express investment views and seek additional returns:
Types of Satellite Investments
Sector ETFs
- Technology, healthcare, financials, energy
- Overweight sectors you believe will outperform
- Example: Technology sector ETF if bullish on tech
Factor Funds
- Value, momentum, quality, low volatility
- Target specific investment factors with historical premiums
- Example: Small-cap value fund for higher expected returns
Thematic Investments
- Clean energy, artificial intelligence, cybersecurity
- Bet on long-term trends and themes
- Example: Robotics and AI ETF
Individual Stocks
- High-conviction single stock positions
- Companies you have researched thoroughly
- Example: A few individual stocks you believe in strongly
Alternative Strategies
- REITs for real estate exposure
- Commodities for inflation protection
- Dividend growth stocks for income
Sample Core-Satellite Portfolios
Conservative Approach (80/20)
Core (80%):
- 40% US Total Stock Market
- 20% International Stocks
- 20% Total Bond Market
Satellites (20%):
- 10% Dividend Growth ETF
- 10% Small-Cap Value Fund
Moderate Approach (70/30)
Core (70%):
- 35% US Total Stock Market
- 15% International Stocks
- 20% Total Bond Market
Satellites (30%):
- 10% Technology Sector ETF
- 10% Healthcare Sector ETF
- 5% REITs
- 5% Individual Stocks
Aggressive Approach (60/40)
Core (60%):
- 40% US Total Stock Market
- 20% International Stocks
Satellites (40%):
- 15% Individual Stock Picks
- 10% Emerging Markets
- 10% Small-Cap Growth
- 5% Thematic ETF
Managing Your Core-Satellite Portfolio
Rebalancing
- Rebalance satellites back to target weights periodically
- Do not let successful satellites grow to dominate the portfolio
- Consider rebalancing when satellites drift 5%+ from targets
Evaluating Satellites
- Review satellite performance annually
- Compare to relevant benchmarks, not just absolute returns
- Be willing to cut satellites that consistently underperform
- Have a thesis for each satellite and track if it is working
Adding New Satellites
- Have a clear investment thesis before adding
- Start with smaller positions and increase if thesis proves out
- Avoid too many satellites, which adds complexity
Common Mistakes to Avoid
- Too many satellites: Keep it manageable with 3-6 satellite positions
- Satellites too large: Stick to 20-40% maximum in satellites
- Chasing performance: Do not add satellites just because they did well recently
- Overlap with core: Ensure satellites add exposure, not duplicate the core
- Ignoring costs: Satellites should not have excessive fees
- No clear thesis: Know why you own each satellite
Analyze Your Portfolio Structure
Pro Trader Dashboard helps you visualize your core and satellite holdings clearly.
Summary
Core-satellite investing combines the best of passive and active strategies. Build a strong core with low-cost index funds covering the broad market. Add satellites strategically to pursue specific opportunities or express investment views. Keep satellites to 20-40% of your portfolio and have a clear thesis for each one. Review and rebalance regularly. This approach gives you the reliability of indexing with the potential for enhanced returns.
Learn more: asset allocation guide and growth vs value investing.