X-Plained: What is a Core ETF?

“Core ETFs” typically refer to a group of exchange-traded funds that help form the foundation of a portfolio. These ETFs are designed to provide exposures to a market, asset class, or sector in which the investor holds a high conviction. In general, core ETFs are characterised by their low costs, diversified holdings, and long-term investment horizons.

Let’s X-Plain:

  • What is the core and satellite model?
  • Why use core ETFs?
  • What can go into the core?
  • Which ETFs can you use in your core?

What is the Core and Satellite Model?

The core and satellite model involves combining a stable, diversified “core” portfolio with a more specialised, and potentially higher-return, “satellite” portfolio. The core usually consists of conservative, long-term holdings like index funds or ETFs, providing a foundation for the strategy. Whereas the satellite often includes more targeted investments like individual stocks, thematic ETFs, or alternative assets, which offer higher growth potential. By incorporating both components, this approach allows your portfolio to strike a balance between stability and growth.

Why Use ETFs in the Core?

Core ETFs are a great option for those looking to build the foundation of their portfolios. They offer efficient and diversified access across a broad range of assets from market indexes to bonds and precious metals. Additionally, the transparency and liquidity of ETFs provide ease of access and flexibility in buying or selling positions. Ultimately, incorporating core ETFs into a portfolio offers a blend of diversification, cost efficiency, and accessibility, making them a valuable tool for both novice and seasoned investors alike. For more on investing with ETFs, please see “X-Plained: What are ETFs?”.

However, it’s important to note that while core ETFs are designed for long-term investing, they are not without risk. Market conditions and economic factors can affect the performance of these funds. Therefore, it’s crucial to conduct thorough research and consider consulting a financial advisor before making any investment decisions.

What can go into the Core?

Core holdings are the fundamental investments of a portfolio, usually suited for long-term strategies due to their low volatility and diversification. Some common examples of core holdings include:

  • Index funds and ETFs, which track the performance of market indices, providing broad exposure across various sectors.
  • Bonds, whether government or corporate, offer regular interest payments and are generally considered lower risk compared to stocks. These can sometimes serve as cash equivalents due to their liquidity and consistent yield.
  • Alternative assets, such as precious metals, can help to smooth out volatility thanks to their low correlation to equities and market indexes.
  • Diversifiers, such as sector-specific or sector-excluding funds, can provide investors with the tools to maintain broad diversification while also adjusting their specific exposures.

What are Some Examples of Core ETFs?

Core ETFs come in numerous shapes and sizes, and can encompass many different strategies.

Index ETFs

Example fund: The Global X US 100 ETF (ASX: N100) provides investors with efficient exposure to 100 of the top technology and innovation driven companies on the US market. N100 is an example of a growth-oriented holding that may fit in the core of your portfolio. As an index fund, N100 provides a well-diversified exposure to industries such as information technology, consumer goods, healthcare, food services and more.

Bonds/Cash Equivalents

Example fund: The Global X US Treasury Bonds ETF (Currency Hedged) (ASX: USTB) offers efficient exposure to US treasury bonds, the largest and most liquid bonds in the world. These bonds are often considered the safest assets, outside of cash, to have in your investment portfolio. USTB invests in a diversified portfolio of US treasury bonds and seeks to generate consistent income while mitigating risk.

Alternative Assets

Example fund: Global X Physical Gold (ASX: GOLD) provides investors with direct, efficient, and secure access to physical gold without the need to store it themselves. Gold is one of the most common alternative assets in portfolio allocation as it has historically outperformed when other assets struggled. It is also a hedge against crises thanks to its low correlation with global markets.

Diversifiers

Example fund: The Global X Australia ex Financial & Resources ETF (ASX: OZXX) is an example of a diversifier which investors can use as a portfolio completion tool. OZXX invests in Australia’s top 100 companies excluding financials (including REITs), material and resource sectors, enabling investors to control their degree of exposure to ASX heavyweights.

Related Funds

N100: The Global X US 100 ETF (ASX: N100) invests in 100 of the largest non-financial companies listed on the US market. It focuses on innovation-driven companies, providing a growth tilt to core portfolio holdings.

USTB: The Global X US Treasury Bond ETF (Currency Hedged) (ASX: USTB) invests in US Treasuries across the yield curve while providing currency hedging.

GOLD: Global X Physical Gold (ASX: GOLD) invests in physical gold via the stock exchange.

OZXX: The Global X Australia ex Financials & Resources ETF (ASX: OZXX) invests in Australia’s top 100 companies, excluding those in the financial (including REITs), basic material, and energy sectors.