Investment Education Investment Products ETFs Advanced ETF Strategies Core-Satellite Strategy
Advanced ETF Strategies
The core-satellite strategy seeks to merge index investing with active management to attempt to outperform the market. A core-satellite portfolio will typically contain a significant investment in an index-based security, such as a broad-market ETF, and a smaller proportion of investments in more dynamic securities such as sector ETFs, mutual funds or individual stocks.
For example, a core-satellite portfolio with an 80/20 balance might contain:
80% XYZ broad-market ETF (core)
5% ABC sector ETF (satellite)
5% DEF sector ETF (satellite)
4% GHI sector ETF (satellite)
3% JKL stock (satellite)
3% MNO stock (satellite)
This investor wants her portfolio to behave mostly like the overall market, but she believes that sectors ABD, DEF and GHI will outperform the market in the short-term, as will companies JKL and MNO. In market speak, she has "overweighted" those sectors in her portfolio. While her core, ETF XYZ, will likely remain in her portfolio over the long-term, her satellites may come and go as she anticipates market moves.
ETFs are increasingly popular core investments because they typically provide diversification, low expense ratios and relative tax efficiency. The greater the percentage represented by the core, the more the portfolio will tend to behave like the overall market, which can be risky in times of high market volatility, but also ensures market participation during positive market movements.
Core and satellite is an active management strategy, and thus during down markets, its returns will tend to underperform passive strategies after taxes and expenses. And, just as having the core tied to the overall market can be risky, putting portfolio weight behind specific sectors, stocks or actively managed funds can also increase your risk potential.
Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange-Traded Fund (ETF) carefully before investing. Leveraged and Inverse ETFs may not be suitable for all investors and may increase exposure to volatility through the use of leverage, short sales of securities, derivatives and other complex investment strategies. These funds' performance will likely be significantly different than their benchmark over periods of more than one day, and their performance over time may in fact trend opposite of their benchmark. Investors should monitor these holdings, consistent with their strategies, as frequently as daily. A prospectus contains this and other information about the ETF and should be obtained from the issuer. The prospectus should be read carefully before investing.
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