The core-satellite portfolio strategy combines the best of passive and active investing: a low-cost, broadly diversified index ETF “core” forms the foundation, while smaller “satellite” positions provide targeted exposure to specific themes, sectors, or strategies.
The Core-Satellite Concept
Core (typically 70–90% of portfolio):
- Low-cost, broadly diversified index ETFs
- Captures market returns at minimal cost
- Provides the portfolio’s stable foundation
- Minimal management required
Satellites (typically 10–30% of portfolio):
- Individual shares, thematic ETFs, active funds, or alternative assets
- Targeted exposure to specific views or opportunities
- Higher expected return or different risk characteristics (with higher risk)
- Requires more attention and monitoring
Example Core-Satellite Portfolios
Simple core-satellite (growth investor)
| Component | Allocation | Investment | Role |
|---|---|---|---|
| Core | 50% | VGS (global shares) | Broad global market exposure |
| Core | 30% | VAS (Australian shares) | Australian market + franking |
| Satellite | 10% | NDQ (NASDAQ-100) | US tech concentration bet |
| Satellite | 10% | VAP (A-REITs) | Property income diversification |
| Total | 100% |
Balanced core-satellite (income + growth)
| Component | Allocation | Investment | Role |
|---|---|---|---|
| Core | 40% | VAS (Australian shares) | Franked income + growth |
| Core | 20% | VGS (global shares) | International diversification |
| Core | 15% | VAF (bonds) | Defensive component |
| Satellite | 10% | VHY (high yield) | Income enhancement |
| Satellite | 10% | VAP (REITs) | Property income |
| Satellite | 5% | GOLD | Inflation hedge |
| Total | 100% |
Choosing Core ETFs
The ideal core ETF is:
- Broadly diversified: Covers hundreds or thousands of securities
- Low cost: MER as low as possible (VAS 0.07%, VGS 0.18%)
- Liquid: High trading volumes on ASX for easy buying/selling
- Transparent: Clear index methodology; you know what you own
Common Australian core ETFs:
| ETF | Index tracked | Holdings | MER | Role |
|---|---|---|---|---|
| VAS | S&P/ASX 300 | ~300 Australian companies | 0.07% | Australian core |
| A200 | S&P/ASX 200 | 200 largest ASX companies | 0.04% | Australian core (lower cost) |
| VGS | MSCI World ex-Aus | ~1,500 global companies | 0.18% | International core |
| IWLD | MSCI World | ~1,500 global companies | 0.09% | International core (lower cost) |
| VDHG | Diversified high growth | 7,000+ securities | 0.27% | All-in-one core option |
Choosing Satellite Positions
Satellites should add something distinct from your core — not just duplicate it. Consider:
Concentration bets: Overweight a sector you believe will outperform (e.g., NDQ for technology, HACK for cybersecurity)
Income enhancement: Add high-yield ETFs (VHY) or REITs (VAP) for more income than the broad market delivers
Factor exposure: Add “smart beta” ETFs targeting value, quality, or momentum factors (VVLU, AQLT)
Geographic tilts: Overweight emerging markets (VGE), Asian markets (IAA), or specific countries
Inflation hedges: Gold (GOLD), commodities (QCB), infrastructure (MICH)
Individual shares: Specific companies where you have conviction (requires individual stock research)
Managing the Core-Satellite Portfolio
- Rebalance the core regularly: Keep core within 5% of target allocation
- Let satellites run or exit: Unlike the core, satellites may be held for a thesis — if the thesis plays out, consider taking profits or exiting
- Don’t let satellites grow too large: If a satellite grows from 10% to 25% through outperformance, rebalance it back — concentration risk grows
- Keep costs low overall: Even if satellites have higher MERs, keeping them to 10–30% of the portfolio limits the overall cost impact
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Frequently Asked Questions
What is the best core ETF for an Australian portfolio? VAS (Vanguard Australian Shares, 0.07% MER) and VGS (Vanguard International Shares, 0.18% MER) are the most commonly used core ETFs for Australian investors. A200 (0.04% MER) is a lower-cost alternative to VAS for Australian shares. The “best” depends on your allocation preferences. General information only.
How many satellite positions should I have? Two to four satellite positions is typical for a core-satellite portfolio. More than five begins to add unnecessary complexity — the portfolio starts to look more like an active fund than a disciplined core-satellite structure. Each satellite should have a clear reason for inclusion and a target allocation.
Should I use individual stocks as satellites? Individual stocks as satellites are appropriate if you have the time and analytical ability to research them meaningfully. For most investors, thematic ETFs (NDQ, HACK, VHY) are better satellites than individual stocks — they provide concentrated exposure without single-company risk.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.