Core Satellite Investment Guide

Core satellite investment is a portfolio construction method designed to minimize costs, tax burdens, and volatility, while providing opportunities to exceed the overall stock market. The core of the portfolio includes passive investments that track major market indexes, such as the Standard & Poor’s 500 Index (S&P 500). Additional positions (called satellites) are added to the portfolio in the form of actively managed investments.

Here is how the core satellite investment works:

Portfolio construction

First, look at the core parts of your portfolio. Assets will be allocated to investments aimed at passive management. For example, you can put half of the assets dedicated to stocks into an index fund that tracks the S&P 500 index.

For the active management part, the goal is to select the skills of the portfolio manager to provide the opportunity to obtain investments with higher returns than the passive part of the portfolio.

In this example, you can invest 10% of your investment portfolio in a high-yield bond fund and distribute the remaining stocks equally to biotechnology funds and commodity funds. Asset allocation may be broken down, as shown in Figure 1 below.

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invest percentage
Standard & Poor’s 500 Index Fund 50%
Actively Managed High Yield Bond Fund 10%
Actively manage biotechnology funds 20%
Actively manage commodity funds 20%

figure 1

Remember, this portfolio is just an example. The core part of the portfolio can be used to track any index, including those that are intended to reflect higher value than growth, growth higher than value, government bonds higher than corporate bonds, domestic markets higher than foreign markets, or any style bias you like. Similarly, the sky is the limit of the satellite part.

The essence of strategy

No matter what specific investment is chosen to achieve asset allocation-cost, portfolio volatility and investment return are all potential considerations.

A brief review of each area provides additional insights:

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The core part of the investment portfolio helps minimize costs, because passive investment is almost always cheaper than active investment. Since passive investment tracks the index, the investment portfolio only changes when the index changes. Since the index rarely changes, transaction costs and capital gains tax are minimized. On the other hand, active portfolio management is based on transactions. Every transaction generates execution costs and potential tax liabilities in the form of capital gains.


Beta is an indicator that measures the volatility of the stock market. Volatility is something many investors like to avoid. By using a large portion of the portfolio for passive investment, the beta of the total portfolio should not be very high. Increasing investments that have nothing to do with the overall stock market trends, such as commodity funds, can help limit overall volatility when the market fluctuates.

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return the goods

Active managers seek to exceed their benchmarks. By allocating a small portion of the portfolio to active management, active managers have the opportunity to exceed the benchmark, thereby increasing the return generated by the entire portfolio and causing the return of the entire portfolio to exceed the benchmark.

How to implement the strategy

The core satellite combination can be implemented in a variety of ways. As shown in Figure 1, a mutual fund-based investment portfolio is only one potential implementation method. The strategy can also be implemented using various combinations of separately managed accounts, exchange-traded funds (ETFs), mutual funds, stocks, bonds, and any other core index tracking investment and Alpha Seeking investment combination.

Bottom line

The core-satellite approach provides an opportunity to access the best things in all the world. Better-than-average performance, limited volatility, and cost control are all concentrated in a flexible package that can be specifically designed to meet your needs.


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