Balancing Core & Satellite Funds

Considered your portfolio structure lately? A new year looms, and investors may want to consider their overall investment structure. When investing with ETFs and mutual funds, especially, understanding the balance between core and satellite funds matters. The way they interact, and the different purposes they serve, can help guide investment decisions when crafting a long-term portfolio.

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What exactly does one mean when discussing core and satellite funds? Core strategies serve as the backbone of a portfolio. Often, but not always, core strategies track well-known indexes and look to drive steady performance with a long-term view. ETFs specifically can play that role well, offering tax efficiencies while tracking the broader market via indexes like the S&P 500

The Role of Core & Satellite Funds

Other times, one might look to a core fund with a bit more specific of a target. For example, a fund might track the S&P Small Cap 600 Index as part of a group of core strategies. While still intended as a long-term hold, one could merge a small-cap index with a large-cap index to make one core allocation.

In the satellite side of the equation, investors may want to get a strategy with more oomph. Oftentimes, that entails investing in a targeted equity or fixed income sleeve, or in a strategy that leans heavily into a big idea, like momentum. For example, when crafting an equity allocation, one might look to a fund like FDMO, which screens stocks based on momentum as a metric.

What might an example of a portfolio using core and satellite funds look like? For a satellite allocation, one could consider the Fidelity Momentum Factor ETF (FDMO). Charging just 15 basis points, FDMO embraces an approach that looks to price, earnings, and sentiment trends to identify firms potentially able to outperform in the medium term. Its focus on that specific idea positions it to potentially outperform, but it also adds the risk that comes with such a dedicated focus.

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Over the last year, the ETF has returned 46.1%, per Fidelity Investments data. In a portfolio using core and satellite funds, one could pair that fund with a more general S&P 500-focused ETF. Together, such an approach can combine steady performance with potential spikes from satellites, offering a new idea or set of ideas with which to enter 2025.

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Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.

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