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Mutual Fund Education

Benefits of Core-Satellite Investing

David Dierking Feb 20, 2018


The “core” of the portfolio consists of broadly diversified low-cost index funds and is designed to be the foundation around which a portfolio is built. The “satellite” part involves selectively overweighting specifics sectors and regions of the markets in order to generate above-average returns. This requires an active management approach that involves regular oversight of the portfolio in order to take advantage of opportunities. While the core-satellite strategy can be a good, conservative way to try to beat the market, it’s not a fit for everyone.

Find out about the most important criteria for selecting a mutual fund here.


Benefits of Core and Satellite Approaches


The satellite gives investors the opportunity to tilt their portfolio in order to take advantage of current market conditions. For all their benefits, the one drawback of index funds is that their only job is to track an index. It makes no effort to adjust based on what’s going on in the economy or the financial markets. If the market appears significantly overvalued and ripe for a correction, the index fund makes no adjustments. The satellite approach involving active management strategies creates opportunities to react to these events and adjust accordingly to either protect the portfolio or position it to profit. If used to make conservative changes, the satellite can potentially deliver above-average returns without significantly altering the overall portfolio’s risk profile.

What is Core-Satellite Investing? Click here to find out.


Benefits of Implementing Both Strategies Together


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Disadvantages of the Core-Satellite Strategy


Moreover, a core-satellite strategy has the potential for reduced tax efficiency. Actively-managed funds tend to do a fair amount of trading in order to deliver returns. That trading tends to result in higher transaction costs and possible taxable capital gains distributions.


The Bottom Line


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