The Core Satellite Approach Strategy For Portfolio
Constructing your portfolio is a crucial element of your investment strategy. One well-known approach is the “core/satellite” strategy, which employs ETFs as a valuable tool to implement this method throughout your portfolio. This investment approach entails diversifying your holdings by investing in broad domestic or global exposures, which are intended to be bought and held for an extended period of time. This is the “core” component of the strategy.
In addition to the “core,” more tactical positions are added to the portfolio, forming the “satellite” component. These positions are actively managed and can include specific regional or sector exposures.
Core Satellite Investment Approach
The Core-Satellite approach can be used a guide for portfolio construction for a new investor.
This approach is where the core of the portfolio follows the market, while the satellite aspect of the portfolio involves active management of the portfolio. This strategy combines the benefits of both passive and active management. For instance, on one hand, the core of this portfolio is made up of ETFs which are a pool of funds invested in a wide range of assets. On the other hand, the satellite aspect of a portfolio involves more active management for it concerns investing in individual stocks.
Moreover, the core-satellite approach minimises the FOMO (fear of missing out) since the core of the portfolio typically encompasses a wide array of assets, while the investor may select individual stocks in the ‘satellite’ bracket of his portfolio.
The core assets typically focus on Exchange Traded Funds to allow an investor to quickly own diversified sets of securities. ETF investing is a simple path towards portfolio diversification which should have the benefit of minimising risk.
Core assets that an investor may consider:
- Vanguard Dividend Appreciation ETF (VIG): This ETF focuses on companies that have records of high dividends over time including Microsoft Corp. and Visa Inc.
- Vanguard Growth ETF (VUG): VUG however, is more focused towards growth by concentrating on sectors like technology and the financial services sector. Although, having a low dividend yield (0.94%), VUG focuses on sustained growth.
- Vanguard International High Divided Yield (VYMI): The two previous ETFs invest mainly in US companies. As a balancing exercise, VYMI may considered because of its international profile which increases diversification and hence reduces risks. This ETF will ensure international exposure as opposed to focusing solely on the US market, where such market may be subject to domestic economic conditions that undermine this portfolio.
The satellite assets involve active management and may be considered riskier since they may include assets from an investor’s personal preference. Recommending general satellite stocks for an investor to consider may be challenging, since every investor is unique. For example, an investor may prefer to avoid the tobacco industry, arms industry, and any company that engages in animal testing.
In conclusion, the Core-Satellite approach offers a simple yet effective strategy for new investors to construct their portfolios. By combining the benefits of passive and active management, this approach minimizes the fear of missing out while diversifying the investor’s holdings. The use of Exchange Traded Funds as core assets is a straightforward path towards portfolio diversification, and the inclusion of international exposure further reduces risks. Meanwhile, the satellite assets provide the opportunity for active management and personal preference in investment choices.