For many new investors, learning how to structure a portfolio is one of the first questions they encounter. With hundreds of exchange-traded funds (ETFs) now listed on the ASX, the menu of options can feel overwhelming.
One framework that investors often turn to is core-satellite investing. It’s a simple yet flexible way of combining broad, long-term holdings with more focused investments. And because ETFs provide aim to provide diversification, transparency, and cost-efficiency, they can sometimes fit neatly into both parts of the approach.
So what exactly is a core-satellite portfolio, and how might it be applied using ETFs? Let’s break it down.
What is a core-satellite portfolio?
At its heart, the core-satellite strategy splits a portfolio into two distinct parts:
- The core : This is the stable foundation, typically holding broad-based, low-cost, and diversified investments. The core is designed to deliver steady market returns over the long run.
- The satellites : These are smaller, complementary positions around the core. They can target specific sectors, themes, or strategies. Satellites provide flexibility, allowing investors to tilt their portfolio toward areas they find promising or personally meaningful.
Think of the core as the engine of a car – reliable, powerful, and doing most of the heavy lifting. The satellites are like accessories and features – they don’t power the car, but they can make the ride more interesting.
Why use ETFs in core-satellite investing?
Under the right conditions, ETFs can be well-suited to this framework for several reasons:
- Diversification : A single ETF can provide exposure to hundreds of companies or bonds, reducing individual security risk.
- Cost-efficiency : Many ETFs, especially those tracking broad indices, can have low management fees.
- Transparency : ETF holdings are usually published daily, so investors know exactly what they own.
- Flexibility : With ETFs covering Australian shares, global markets, bonds, sectors, and themes, they can serve both the core and the satellites.
For example:
- Core positions might include an ETF tracking the ASX 200, a global equities ETF, or a bond ETF.
- Satellites might be ETFs focused on technology, clean energy, small caps, or specific regions like emerging markets.
Designing the core with ETFs
Most of a core-satellite portfolio sits in the core – often around 60–80% of the total. This is the bedrock intended to grow over a long timeframe.
Key elements of a core might include:
- Australian equities ETFs : For example, ETFs tracking the S&P/ASX 200 or ASX 300, giving exposure to large, familiar companies like the banks and miners. These can also provide franking credits, which are a unique tax feature of the Australian system.
- Global equities ETFs : ETFs that track global indices such as the MSCI World or the S&P 500 provide diversification beyond Australia’s concentrated market. Many investors use global ETFs to access sectors that are underrepresented locally, like technology and healthcare.
- Bond ETFs : For those who want to balance risk with defensive assets, ETFs tracking Australian government or corporate bonds can add stability, especially in conservative portfolios.
The core is where low fees, diversification, and long-term compounding matter most. Since it does most of the work, it can make sense to some investors for the core to be broad, durable, and simple.
Building the satellite positions
The satellite portion is where investors can be more tactical or expressive. Satellites generally make up 20–40% of the portfolio, depending on preferences and risk tolerance.
Common types of satellite ETFs include:
- Sector ETFs : For example, technology, healthcare, or resources. These let investors tilt towards industries they expect to grow.
- Thematic ETFs : Covering areas like clean energy, cybersecurity, or ESG (environmental, social, and governance). These align portfolios with specific trends or values.
- Factor ETFs : Some ETFs focus on strategies like high dividends, value, or small-cap companies. These can add different risk-return characteristics.
- Regional ETFs : Beyond global indices, investors might want exposure to emerging markets, Asia, or Europe specifically.
The key with satellites is size. Because these ETFs are narrower and often more volatile, they usually remain smaller allocations so they don’t dominate risk exposure.
Potential benefits of a core-satellite portfolio
A core-satellite structure can offer several potential advantages:
- Balance between stability and flexibility : The core can provide discipline, while satellites allow experimentation.
- Diversification with personalisation : Investors can get broad market exposure but can also reflect their interests or views.
- Potential for enhanced returns : If a satellite performs well, it can add to the overall outcome without jeopardising the stability of the core.
- Psychological comfort : Having a strong core can help investors stay the course during market volatility, while still giving room for creative choices.
Risks and considerations
Of course, no strategy is without drawbacks. Some important considerations include:
- Over-complication : Too many satellites can make a portfolio hard to track and dilute the purpose of the core.
- Concentration risk : If satellites are too large, the portfolio can become skewed towards one theme or sector.
- Monitoring requirements : Satellites may require more frequent review to ensure they still fit the investor’s objectives.
- Tax implications : In Australia, capital gains tax applies when selling ETFs, and international ETFs may come with withholding taxes. Franking credits on Australian shares may benefit some investors, but not others. If you're not sure where you land on the topic of franking credits, consider speaking with a licensed financial adviser.
These factors highlight why investor goals, risk tolerance, and time horizon are central when applying the framework.
Examples of core-satellite structures
To illustrate, here are a few sample structures. These are for educational purposes only , and not recommendations.
-
Conservative portfolio
- Core (80%): 40% Australian equities ETF, 20% global equities ETF, 20% bond ETF.
- Satellites (20%): 10% dividend-focused ETF, 10% ESG-themed ETF.
-
Balanced portfolio
- Core (70%): 30% Australian equities ETF, 30% global equities ETF, 10% bond ETF.
- Satellites (30%): 15% technology ETF, 10% healthcare ETF, 5% small-cap ETF.
-
Growth portfolio
- Core (60%): 20% Australian equities ETF, 40% global equities ETF.
- Satellites (40%): 15% emerging markets ETF, 15% clean energy ETF, 10% sector ETF of choice.
These examples show how investors could theoretically tilt portfolios in different directions while keeping a strong foundation.
Final thoughts
A core-satellite portfolio is one way Australians can think about structuring their investments with ETFs. The strategy seeks to balance stability and flexibility: a dependable core of broad-based ETFs alongside smaller satellite positions that reflect specific interests or strategies.
ETFs are particularly useful here because of their diversification, transparency, and cost-effectiveness. Whether investors lean conservative, balanced, or growth-oriented, the core-satellite framework offers a clear way to combine simplicity with personalisation.
Ultimately, the best mix depends on an investor’s risk tolerance , goals, and time horizon. By understanding the role of both core and satellite ETFs, Australians can make more informed choices about how to build their portfolios.
