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section header ETF fundamentals

subsection header Strategies

Active-passive combinations

Actively managed investments offer an opportunity for outperformance, but they also bring greater relative risk and unpredictability.

Low-cost passively managed investments typically reflect the risk and return characteristics of a given market segment but do not offer the opportunity for outperformance. Combining low-cost active funds with index-based ETFs can achieve a balance between the two approaches.


Core-satellite approach

One way to do this is with a "core-satellite" strategy that employs indexing at the core of a portfolio and actively managed funds as satellites. This idea recognizes the differences between index and active fund management and combines the best aspects of both approaches.

The indexed core provides a risk-controlled, low-cost way to capture market returns (beta) over the long term, while the actively managed satellites provide an opportunity for market outperformance (alpha).

Active approach

  • Seeks to outperform
  • Higher costs
  • Higher manager risk

Index approach

  • Seeks market return
  • Lower costs
  • Lower manager risk


Core-satellite methodology

The conventional view of core-satellite methodology (Figure 1) suggests that it's prudent to use index funds for markets that are deemed efficient, such as Canadian large-cap stocks. This view holds that actively managed funds make more sense to use in areas of the market that are considered to be inefficient, such as Canadian small-cap or emerging market stocks. The thinking here is that active managers are more likely to succeed in these areas.


Figure 1

Source: Vanguard. This hypothetical investment or portfolio strategy is shown for illustrative purposes only.


An alternative view of core-satellite investing (Figure 2) suggests that indexing is a powerful investment strategy in all market segments. As a result, the active/index decision should be predicated on an investor's ability to identify low-cost, talented managers, not on the indiscriminate selection of active managers in apparently inefficient market areas. This view holds that skill in selecting managers drives the success of a core-satellite portfolio.


Figure 2

Source: Vanguard. This hypothetical investment or portfolio strategy is shown for illustrative purposes only.


Points to consider

  • There is no guarantee that a combined active-passive approach will be less risky than an all-active or all-index approach and will achieve comparable returns.
  • Whether they choose active or passive funds, investors should consider funds that have low overall costs to increase the probability of long-term success. Costs directly detract from investment returns.


Learn the basics of ETFs, including their history, how they compare to mutual funds, what types are available and more.


Learn about the different types of exchange-traded products, how index and active ETFs are managed and more.


Learn about ETF trading, common order types, premiums and discounts, liquidity considerations and more.

Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Investors should consult a financial and/or tax advisor for financial and/or tax information applicable to their specific situation.

All investment funds, including those that seek to track an index are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While the Vanguard ETFs are designed to be as diversified as the original indices they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment.

All monetary figures are expressed in Canadian dollars unless otherwise noted.