The Core-satellite strategy for investing with ETFs in Switzerland

Have you ever heard of the core-satellite investment strategy? It’s an approach widely used by professionals, pension funds, and asset managers for building robust and diversified portfolios. In this article, we’ll explore the key principles behind this investment strategy and how you can implement it using Exchange-Traded Funds (ETFs) in Switzerland. This technique is a balanced mix of long-term stability and tactical opportunities, allowing for both risk management and enhanced performance potential.

Understanding the core-satellite strategy

The core-satellite strategy is designed to create a balanced, diversified portfolio. It splits your investments into two segments: a “core” (which typically represents around 70–80% of the portfolio) and smaller “satellites” (accounting for 20–30% of the investments). Each part serves a distinct purpose, with the core providing stability and the satellites adding the potential for higher returns through riskier, more targeted investments.

Origins and philosophy behind the strategy

The core-satellite approach was first introduced in 1973 by American economists Fischer Black and Jack Treynor. The goal of this strategy is to achieve diversification and optimize risk versus reward. It allows investors to take advantage of active management opportunities (satellites) while maintaining a passive, stable base (core). This approach can potentially outperform the broader market while reducing the risk of concentrated losses.

Core: the foundation of stability

The “core” of your portfolio is the bedrock, usually composed of low-risk, long-term investments designed for stability and steady growth. In Switzerland, as in many other parts of the world, ETFs that track global indices, such as the MSCI World, the Vanguard FTSE All-World UCITS Dist (VWRL) or the S&P 500, are popular choices for building the core. These index ETFs provide diversification across multiple sectors, industries, and geographic regions. Swiss investors might also opt for Swiss equity ETFs that track the SMI (Swiss Market Index) for more local exposure.

Satellites: Adding dynamism and opportunity

Around the core, you can allocate 20–30% of your portfolio to “satellites.” These are higher-risk investments aimed at generating greater returns. Satellite investments could include:

• Sector-specific ETFs: These target particular industries like technology, healthcare, or energy.
• Country-specific ETFs: For investors looking to bet on the growth of emerging markets or specific economies.
• Thematic ETFs: These are based on specific investment themes, such as clean energy, artificial intelligence, or blockchain technology.
• Individual Stocks: Swiss or international companies that show high growth potential.
• Cryptocurrencies: While volatile, many investors add a small allocation to digital assets like Bitcoin or Ethereum as part of their satellite investments.

By having a combination of core stability and satellite dynamism, you create a balanced portfolio capable of weathering market fluctuations while still capturing growth opportunities.

How to Implement the Core-Satellite Strategy with ETFs

Step 1: Define your core portfolio

The first step in implementing a core-satellite strategy is defining your core portfolio. This part of the portfolio should be globally diversified and stable. In Switzerland, this typically means investing in broad-based ETFs such as:

• Global ETFs: ETFs tracking indices like MSCI World, MSCI ACWI (All Country World Index), or FTSE All-World.
• Swiss Market ETFs: ETFs focused on the Swiss Market Index (SMI) or Swiss Performance Index (SPI) for local exposure.
• Bond ETFs: For those seeking added stability, high-quality government bond ETFs, or corporate bond ETFs can complement the core portfolio.

Your core should require minimal management. The goal is to hold these investments long-term and not react impulsively to short-term market changes.

Step 2: Select your satellite investments

Once your core is established, you can move on to the exciting part: the satellite investments. These will be smaller positions aimed at capturing higher returns by taking on more risk. Some potential satellite investments include:

• Sector ETFs: For instance, a Swiss investor interested in technology might invest in the iShares STOXX Europe 600 Technology ETF.
• Emerging Market ETFs: Such as the iShares MSCI Emerging Markets ETF.
• Cryptocurrency ETFs or ETPs: Switzerland has become a hub for crypto finance, and products like the 21Shares Bitcoin ETP provide easy access to crypto markets.
• Thematic ETFs: If you’re bullish on renewable energy, clean energy ETFs like the iShares Global Clean Energy ETF could fit into your satellite strategy.

The satellite portion of the portfolio is actively managed. You’ll need to monitor these investments more closely, adjusting them based on performance and market conditions. It’s also important to periodically take profits from successful satellite investments and rebalance your portfolio as needed.

Step 3: Regularly rebalance your portfolio

A key aspect of the core-satellite strategy is rebalancing. Over time, the value of your satellite investments may rise or fall significantly. If one of your satellite positions performs particularly well, it might grow large enough to unbalance the risk profile of your portfolio.

For example, if a tech ETF in your satellite portion doubles in value, it may now make up a much larger percentage of your total investments. In such cases, consider selling part of your satellite holdings to bring the portfolio back in line with your original allocation.

Rebalancing is essential to maintain the proportion between the core and satellites, ensuring the core continues to provide the foundation of stability.

Conclusion: Professionalize Your Investment Strategy

The core-satellite strategy is a powerful tool for investors seeking to balance long-term growth with tactical opportunities. By anchoring your portfolio with a stable, diversified core and supplementing it with dynamic satellite investments, you can manage risk while pursuing higher returns. Whether you’re investing in global ETFs, Swiss stocks, or thematic sectors, this approach offers flexibility and adaptability.

Just remember: don’t put all your eggs in one basket. Build your portfolio progressively, and if a satellite investment performs well, consider moving some of the profits into your core for long-term security.

Summary Table: Overview of the Core-Satellite Strategy