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Efficient way to build a core-satellite portfolio by using exchange-traded funds

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par Vincent LLOVIO
Université Toulouse Capitole 1 - TSE - Master 1 in Economics 2016

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3.3 One last word!

In this European ETF survey (2014), the EDHEC risk institute provides some statistics about the preference of European investor for ETFs for their asset allocation in both core and satellite (Appendix 1). The most use ETF in the core is the broad market ETF. For instance, 69% of equity broad market ETFs users use them in the core. Whereas style, sector and other narrow ETFs lie mainly in the satellite. For instance, 59% of equity sector ETFs users use them in the satellite. Note that these ETFs are clearly less popular than broad-based ETFs. Some investors use ETFs both in core and satellite. The equity broad market ETF is the one which is the most use in both part of the portfolio (12,5%). This study approves what I said in the two previous section. That is to say, the narrower ETFs are widely used as satellite vehicles for tactical asset allocation and the core is built around broad market ETFs to get a broadly diversification.

To sum up, ETFs are especially adapted to the core/satellite approach. They offer a natural vehicles for implementing allocation strategies both in the core and in the satellite. Their use can help to optimize the risk/return of the portfolio. On one hand, they allow to get easily a broadly diversified core. On the other hand, they can help investors to improve the return of the portfolio thanks to the addition of specific ETFs in the satellite. Their tradability is one of their main advantages, we're going to see that this later allows the management of highly dynamic strategies by facilitating the shifts from the core to satellite.


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