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With the ink barely dry on Eugene Fama’s work that crystallized the Efficient Market Hypothesis in 1970,¹ the idea of core-satellite was already taking root in portfolio management circles. And while the passive investing megatrend took its first momentous step a year later, in 1971, when the first passive fund was launched, the entrance of ETFs in the 1990s gave the core-satellite model another shot in the arm.

More recently, as the cost of ETFs has come down and widened the buyer base, the core-satellite model is arguably as relevant as ever.

As an investment vehicle, an ETF can give investors exposure to virtually every conceivable type of security, commodity, index, market or country without the need to own the underlying asset. They have surged in popularity and in the US alone, for example, there were 3,685 ETFs covering assets valued at some USD 10.7 trillion as at the end of January, according to the Washington-based Investment Company Institute.²

ETF fund assets increased by USD 385 billion, or 3.7%, just in that month, and the number in existence was a net 517 higher than it was 12 months previously, the Institute said. The US is the biggest market for ETFs but globally there are comfortably more than 10,000 funds. What’s more, according to a report by consultants at PwC,³ global ETF assets under management increased by a record 27 % to USD 14.6 trillion in 2024 and are predicted by some industry executives to reach as much as USD 30 trillion by 2029.⁴

The way ETFs are structured and traded can also make them relatively more tax efficient than a conventional mutual fund. In general, an ETF manager can meet redemption payments and rebalance the portfolio by exchanging securities for fund shares issued in kind. This means that no underlying assets are sold and no liability for capital gains tax is incurred.⁵

The idea behind core-satellite is simple. As asset prices reflect all available information, it is impossible (or at least extremely difficult) to "beat the market" consistently on a risk-adjusted basis because market prices should only react to new information. In which case, a core-satellite portfolio could potentially generate the best level of risk-adjusted returns.

Following such an approach means that 80% (although this can vary) of the portfolio is allocated to “core” holdings which form the stable part of the portfolio and is based on low-cost solutions. Typically, this is either invested in a combination of broad exposures like MSCI World and MSCI Emerging Markets as core, or split across broad exposures into different regional or country exposures, such as the MSCI USA or S&P 500 for US large cap, MSCI Europe, MSCI EMU, and MSCI Japan.

This is then combined with interesting and tactical satellite solution, which make up the remaining 20%. (Although the exact ratio between core and satellite can vary, the key premise holds constant.) The tactical part of the portfolio adds further diversification of the overall portfolio by adding satellite exposures. It also offers additional flexibility by adding or removing satellite exposures based on market movements and developments. Satellite exposures could range from Nasdaq 100, China tech, gold, silver, commodities and niche areas of fixed income.

The use cases for ETFs have been expanding as the cost has come down in recent years. More and more investor types are appreciating the transparency, simplicity and flexibility they offer when allocating to certain exposures. And with increased innovation and product launches, this opportunity set is widening. Overall, they are a highly efficient way to gain market exposure.

Portfolios can be constructed based on individual risk profile of each investor. The modular nature of core-satellite means investors can achieve an attractive risk return profile for an overall portfolio based on broad diversification principles at a competitive cost.

Risks

Investment in ETFs may be subject to additional risks vs. investing directly in the ETF's underlying securities. These risks include the possibility that an ETF may experience a lack of liquidity that can result in greater volatility than its underlying securities; an ETF may trade at a premium or discount to its net asset value, or an ETF may not replicate exactly the performance of the benchmark index it seeks to track. In addition, investing in an ETF may also be more costly than if a portfolio had owned the underlying securities directly. All investments are subject to market fluctuations. Every investment has specific risks, which can significantly increase under unusual market conditions.

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^1. Efficient Capital Markets: A Review of Theory and Empirical Work, Eugene Fama, Journal of Finance, May 1970.
^2. February 27, 2025
^3., PwC, March 04, 2025
^4. This does not constitute a guarantee by �۶���Ƶ Asset Management
^5. This cannot be considered as tax advice. Investors should seek advice from their own tax advisers based on their individual facts and circumstances.