Core-Satellite Strategy
A portfolio construction approach combining a low-cost passive index core with smaller active satellite positions designed to generate alpha.
What is Core-Satellite Strategy?
The core-satellite strategy divides a portfolio into two components: a large, low-cost passive core (typically 60–80% of assets) invested in broad market index funds to capture market returns, and smaller satellite positions (20–40%) in active funds, individual stocks, sectors, or alternative strategies that aim to outperform the benchmark and add diversification. The passive core controls overall costs and ensures the portfolio captures most of the market return regardless of satellite performance. The satellites allow selective active bets without subjecting the entire portfolio to active management fees and tracking error. The strategy is widely used by institutional investors, endowments, and sophisticated retail portfolios seeking a balance between cost efficiency and return enhancement.
Example
An investor puts 70% of their $200,000 portfolio into a total market index fund (core) and allocates the remaining 30% across three satellites: a small-cap value ETF, a developed-markets active fund, and a real estate investment trust. The core anchors long-run returns while the satellites target specific factor exposures and income.