For many investors, building a portfolio that balances growth, simplicity, and low costs is a priority. Core ETFs are designed with that balance in mind. Acting as the foundation of many investing portfolios, core ETFs provide broad exposure to key markets, allowing investors to capture the overall growth of an economy without frequent management or high fees.

While we’re not recommending you do or don't invest in them, we do believe that an informed choice is usually a better one. By understanding how a core ETF functions, you can make an educated decision about whether they suit your own investment approach. And as always, speak to an adviser to get personalised advice on your investment strategy.

What makes a core ETF?

Core ETFs are exchange-traded funds designed to serve as a stable foundation for an investing portfolio. Rather than targeting narrow sectors or trends, core ETFs provide broad exposure across major asset classes. These include domestic and international equities, bonds , and other diversified holdings. They’re built to mirror the overall market’s performance, offering a way to participate in economic growth without the need to actively manage or try to outperform the market.

Typically, core ETFs track large, established indexes like the ASX 200, S&P 500 , or total market indices. In doing so, they seek to capture the collective movement of various sectors, industries, and/or geographies. This structure can make them an efficient and balanced option, ideally providing broad diversification that suits the needs of long-term investors and forms a reliable building block in a diversified portfolio .

How core ETFs could strengthen a portfolio

Core ETFs play a central role in many long-term portfolios, potentially offering stability and steady growth potential over time. Their primary purpose is to be a reliable, low-maintenance investment that keeps the portfolio on a balanced track while providing exposure to market-wide gains. As such, they typically serve as a solid anchor, while other, smaller investments – often called satellite investments – can add layers of diversification and potential for higher returns.

This approach, known as core-satellite investing , distinguishes between the relative stability of core ETFs and the higher-risk, more focused returns of satellite investments. While core ETFs represent a broad market approach, satellite investments may include emerging markets ; technology stocks; or industry-specific ETFs that may boost returns but also increase risk.

Potential benefits of core ETFs include:

• Broad diversification : Investing across sectors and companies can help to reduce the impact of individual stock volatility.
• Lower fees : Core ETFs typically carry low expense ratios, potentially saving investors money over time.
• Simplicity : Passively managed, core ETFs can make it easier to maintain a steady portfolio without needing constant adjustments.
• Potential for long-term growth : By tracking market indexes, core ETFs can capture the general trend of the economy, potentially offering a stable option for long-term wealth building.

Why core ETFs appeal to many long-term investors

Core ETFs have become popular thanks to their low costs, broad market exposure, and hands-off management style. Compared to actively managed funds, core ETFs tend to have significantly lower fees, a benefit for investors looking to maximise returns without high expense ratios. And since core ETFs generally mirror an index, they avoid the complexities and fees associated with active management.

Core ETFs generally fit well with passive investing strategies . This is where investors buy and hold a diversified portfolio that reflects market trends, rather than attempting to beat the market. This approach has historically performed stably over the long term and can allow investors to participate in the market’s growth without frequent trading. (It’s important to note here that even if an ETF or asset class has performed well historically, it’s not a guarantee of future performance.)

For investors who prefer a “set it and forget it” mentality, a core ETF could be ideal. Since they don’t require frequent monitoring, core ETFs may enable individuals to benefit from market gains without being burdened by constant market analysis and adjustments.

Types of core ETFs to know about

Core ETFs come in several varieties, each designed to capture a particular aspect of the economy. Here’s a brief look at some common types:

• Total market ETFs : These aim to track an entire market, like the Australian or US stock market, offering exposure to both large and small companies across all sectors.
• ASX ETFs: These ETFs track the Australian Securities Exchange (ASX) , providing exposure to Australia’s largest and most established companies.
• S&P 500 ETFs : Following the S&P 500 index, these ETFs cover 500 of the largest US companies, providing a straightforward way to invest in established, industry-leading businesses.
• Broad international ETFs : These ETFs give exposure to other markets outside Australia, helping investors diversify globally and capture growth across other economies, which can be useful when domestic markets slow down.

Each of these ETFs gives investors access to growth potential across regions and sectors, providing various ways to diversify without the need for specific, individual stock selections .

Key considerations before adding a core ETF to your portfolio

Choosing a core ETF should align with your broader investment goals. Here are a few points to consider before incorporating core ETFs into your portfolio:

• Investment goals : Think about what you’re hoping to achieve . For those focused on steady, long-term growth, core ETFs might fit well. But if you’re targeting higher returns in a shorter period (i.e. the anti-Pearler approach), exploring other options may make sense.
• Time horizon : Core ETFs are ideal for those with a longer investment timeframe, as they allow you to benefit from the market’s natural growth over time. If you’re investing for a short-term goal, though, they might not be the best fit.
• Risk tolerance : While generally less risky than niche or thematic ETFs , core ETFs still experience market fluctuations. Knowing your comfort level with this volatility is important.

Understanding the core holdings of a core ETF is also essential. Even though core ETFs cover broad markets, it’s wise to know the specific assets they include, as each market behaves differently under various economic conditions.

How core ETFs work in different strategies

Core ETFs can work in many common investing strategies , potentially allowing them to align with different portfolio goals:

• Buy-and-hold : Since core ETFs track the market and can benefit from long-term growth trends, they may be suited to a buy-and-hold approach. This strategy allows investors to keep their core ETF positions over time, trusting in the general upward trajectory of the market.
• Dollar-cost averaging (DCA) : For those who prefer a more gradual approach, core ETFs can work well with dollar-cost averaging – investing a fixed amount at regular intervals. By purchasing in increments, DCA smooths out the average cost and reduces the impact of short-term market movements.

Core ETFs also help maintain portfolio diversification with minimal management. Their broad exposure makes it easy to hold a balanced portfolio without needing frequent rebalancing . Combined with satellite investments, core ETFs can create a stable foundation that can support other, more dynamic investments.

A re core ETFs right for you?

Core ETFs are a popular choice for investors who want to build a stable, low-cost, and broadly diversified portfolio. They can serve as a steady foundation that aligns well with long-term goals, enabling investors to grow wealth without heavy maintenance or high fees. Whether part of a buy-and-hold, core-satellite, or a dollar-cost averaging approach, core ETFs can offer simplicity and consistency.

You might be someone who values a simple, low-fee investment that requires minimal effort, but still allows you to participate in the overall growth of the economy. In this case, core ETFs may be worth exploring. Understanding how they fit into your own financial goals will help you make an informed decision and build a portfolio that meets your unique needs. However, it's important to remember that no asset class is without risk – and core ETFs are no exception .

If you need help understanding core ETFs or want advice on your situation, reach out to a licensed financial adviser.

Happy investing!