Investing in ETF following a Core-Satellite strategy

In a previous blog, we have discussed how to create in an easy and simple way a portfolio of ETFs that tracks the performance of the world stock market. That is an excellent base and for a lot of people it might be enough. 


Beyond investing in "plain" worldwide ETFs, I personally have a couple of interests and wanted to see if I could invest in them. It turned out I could and there is actually a name for this approach: core-satellite investing.


The idea is to split your portfolio into two parts:

  • The Core represents your worldwide ETFs and should expose you to the maximum amount of diversification
  • The Satellites represent your specific "bets" - e.g. sectors, themes or even single companies

We have already covered several options for the Core - but what could constitute a Satellite? I have one on clean energy for example. 

I strongly believe that to have a future we need to transition towards sustainable forms of energy (e.g. Solar and Wind) and this brings me to the conviction that this part of the economy will grow disproportionally fast. Therefore, for me it made sense to add at ETF on this "theme". It is, by the way, the same we have analyzed in an earlier post - iShares Global Clean Energy UCITS ETF.


Other Themes that might be interesting to follow:

  • Artificial Intelligence - you hear pretty much everywhere nowadays how AI will change the world we live in. Add in other buzz words like Big Data, cybersecurity and you get the idea
  • Biotechnology - you cover companies involved in biomedical and pharmaceutical research. Got a quite a boost thanks to the pandemic
  • Water - some people say water is the new Oil! The ETFs will give you exposure to utilities and other companies involved in the maintenance of water infrastructure
  • Battery Technologies - here you cover the full spectrum of the battery business, from the mining of raw materials to the development and production 

In general you will see that the TER for these ETFs tend to be higher than the one for the Core. It is fairly normal to have TER above 0.4%. Also, the fund size might be lower than what you are used to. My recommendation of not going below 100 mln Euro is applicable to these cases as well - you want your ETF to be liquid in the market.


One word of caution: your satellites should NOT become comparable or even bigger than the Core. That is not the idea. The ratio Core-Satellite should be around 70:30 maximum. Otherwise you are just back to trying and beating the markets with more or less targeted bets. 

I would also regularly check the performance of the Satellites vs Core: are your bets paying off? They should give you higher returns than the Core - in the end that is why you do it: you accept lower diversification overall to reap the benefits of higher returns. 

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