Core-Satellite investing: evolving your ETF portfolio

For many investors, getting started can feel daunting. The investment world is full of options from individual shares, mutual funds, bonds, ETFs, and more, it can be difficult to know where to begin.

Adding in constant market noise about earnings, the economic landscape, global outlook, and the next big opportunity, it can feel that successful investing requires perfecting timing or inside knowledge.

In reality, this is far simpler. Good investing is about structure, discipline, and balance. Having a plan that can withstand market swings whilst still leaving room to pursue opportunities that excite you.

One approach that achieves exactly this is the core-satellite investing strategy.

This strategy, widely used by investment professionals and now increasingly popular with individual investors, helps to combine the best of both worlds. A stable foundation built on low-cost diversified ETFs (the ‘core’ allocation), and a smaller allocation for more focused ideas (the ‘satellites’).

What is the core-satellite strategy?

Thinking of your portfolio as a solar system. The core is the sun – it holds everything together, providing stability and steady performance. The satellites are the planets – smaller, orbiting positions that add extra interest and potentially higher returns.

In practise:

The core usually represents 70%-90% of your portfolio. It is usually made up of broad, low-cost index ETFs, such as those tracking global equities or a mix of shares and bonds.
The satellites make up the remaining 30%-10%. These are more targeted investments and may include sector ETFs, emerging markets, thematic funds (such as blockchain and global water).

This approach allows investors the flexibility to explore selected opportunities and interests they may have whilst still retaining a portfolio that is fundamentally anchored to long-term growth.

Why investors use the core-satellite strategy

There are several reasons why the core-satellite strategy makes sense for UK investors.

Diversification and stability

A well-constructed ‘core’ allocation gives your exposure to hundreds, if not thousands, of companies around the world. This level of diversification helps smooth out performance. If one country or industry struggles, others can offset it.

Flexibility and control

The ‘satellite’ allocation is where investors can be more selective; it allows investors to express their views without taking on excessive risk and match their unique goals.

Discipline and clarity

By defining core and satellite allocations upfront, this avoids temptations for investors to constantly adjust their holdings. It provides a clear framework that keeps investment decisions consistent, even during volatile market conditions.

Potential for outperformance

Satellite allocations are designed to target exposures that are beyond the core benchmark performance, which is expected. By focusing on high-growth sectors or market trends, the satellite allocation can improve the return potential of the portfolio.

Is the core-satellite strategy right for you?

Before adopting the core-satellite strategy, it is important to assess your financial goals, investment horizon, and risk tolerance.

The core-satellite strategy has the potential to distort all of these variables, and despite offering a flexible approach to portfolio management, it may not be suitable for everyone.

How to build a core-satellite portfolio?

Step 1: Set your goals and risk level

Are you investing for a short-term goal or for retirement? The longer your time horizons, the more risk (and potential for growth) you can usually take.

Step 2: Build the Core

Start with the foundation; this will be most of your portfolio. This may include:

A global equity ETF, such as one tracking the FTSE All-World or the MSCI World Index.
A UK Equity ETF, such as one tracking the FTSE 100.
A Global Bond or UK Gilt ETF

There are hundreds of ETFs to choose from with InvestEngine from providers such as BlackRock, Vanguard, Xtrackers, and many more. All offer low-cost options to allocate a portfolio’s core.

Step 3: Adding the satellites

Now that the ‘core’ allocation has been established, we can focus on ETFs to complement the allocation. These could include:

Sector ETFs such as clean energy, healthcare or technology.
Regional ETFs, for example, emerging markets or UK.
Thematic ETFs that focus on trends like artificial intelligence or sustainability.

Step 4: Rebalancing regularly

Over time, it is expected that some parts of your portfolio will grow faster than others. It is important to rebalance your portfolio; this means bringing it back to the target allocation. This ensures that risk remains aligned and allows for locking in gains.

Step 5: Stay focused on the long term

Market volatility is part of investing; whilst these events should be noted, they are not designed to be reactive.

One of the many advantages of this strategy is simplicity; you do not need to react to every market headline.

The ‘core’ allocation is designed to compound steadily over time whilst the satellites give you flexibility.

Key things to watch

Keep satellite holdings manageable: don’t let an idea or personal view dominate your portfolio.

Be patient: Core-satellite invest is a gradual process, not a quick win.

Keep an eye out for costs and overlaps; ETFs costs can affect your returns; there is also the possibility of certain companies being featured across multiple ETFs.

Stay diversified: even within satellite holdings, there is the possibility to be overexposed on a single factor or region.

Review periodically: Ensure that positions are not running away from target allocations.

Key takeaways

For UK investors, the core-satellite strategy offers a clear, disciplined way to invest through ETFs. Investors gain diversification and long-term growth through the ‘core’ allocation, whilst the ‘satellite’ holdings provide flexibility to target opportunities that align with particular interests or outlooks.

It’s a practical, cost-effective framework that fits neatly within tax-efficient wrappers such as ISAs and SIPPs and it can evolve as investor’s goals and circumstances evolve.

FAQs on core-satellite investing

1. What is core-satellite investing? Core-satellite investing is a way of building a portfolio with a stable foundation of low-cost, diversified ETFs (the core) and smaller, more focused positions (the satellites). The aim is to keep your portfolio balanced while still allowing room to explore ideas that interest you.

2. How much of my portfolio should be in the ‘core’? The core usually makes up around 70% to 90% of a portfolio. This part is designed to grow steadily over time, using broad market ETFs. The exact mix depends on your goals and risk tolerance.

3. What types of ETFs typically sit in the core? Most investors use global equity ETFs, UK equity ETFs, and bond ETFs. These give wide exposure to different regions and industries, helping to smooth out ups and downs.

4. What counts as a satellite investment? Satellite positions are the smaller, more targeted parts of a portfolio. These might include sector ETFs such as technology or clean energy, regional ETFs like emerging markets, or thematic ETFs such as AI or water.

5. Why do investors use the core-satellite approach? It offers structure and flexibility. The core provides diversification and stability, while the satellites allow investors to target themes or markets they find interesting without taking on too much extra risk.

6. Does core-satellite investing reduce risk? It can help manage risk because the core is built from diversified, lower-cost ETFs. Satellites are kept small so that even if they are more volatile, they do not dominate the portfolio.

7. How often should I rebalance a core-satellite portfolio? Most investors review and rebalance periodically, for example once or twice a year. The aim is to bring the portfolio back to the target mix, especially if one part has grown faster than the rest.

8. Can I use core-satellite investing in an ISA or SIPP? Yes. Many UK investors use core-satellite portfolios within tax-efficient wrappers such as ISAs or SIPPs. It is a simple way to stay invested for the long term while exploring selected opportunities.

9. What should I watch out for when choosing satellites? Avoid concentrating too much in a single theme or region. Check for overlaps between ETFs, be aware of higher costs in specialised funds, and keep satellites small enough so they don’t skew your overall risk level.

10. Is core-satellite investing suitable for beginners? It can be, because it offers a clear structure. The core helps keep things steady, while satellites allow beginners to learn and explore without taking excessive risk. However, every investor should consider their own goals, risk appetite, and time horizon.

Important information

Capital at risk. The value of your investments can go down as well as up, and you may get back less than you put in.

Tax treatment depends on individual circumstances and is subject to change. ETF costs also apply.

ISA transfers may have implications for your investments. Please consider all factors before deciding to transfer.

This content is for information only and is not financial advice. If in doubt you may wish to consult a professional adviser for guidance.