For example, a number of my clients have 60% in lower beta risk stock assets such as Vanguard High Dividend Yield (VYM), iShares USA Minimum Volatility (USMV), iShares S&P 100 (OEF), First Trust Technology Dividend (TDIV) and/or SPDR Select Sector Health Care (XLV). I even incorporated emerging market Asia via iShares MSCI All Country Asia Ex Japan (AAXJ) into many portfolios. The 40% allocated to intermediate- and longer-term bond funds include those ETFs mentioned in the above-mentioned paragraph, as well as funds like SPDR Nuveen Muni (TFI), iShares Intermediate Term Credit (CIU) and Market Vectors Long Muni (MLN).
What’s noticeably missing from the barbell is a significant allocation to the “middle-of-the-risk-spectrum” assets along the handle. This includes assets like higher yielding bonds, preferreds and REITs. (Note: Another antagonistic commenter who hides under the cloak of his anonymity believes that I missed the REIT boat, failing to understand the risk-reducing goals for a barbell-oriented portfolio.)
My clients have a variety of different risk profiles – income, conservative growth and income, moderate growth, moderately aggressive growth, etc. It follows that not every family has the same assets, let alone a mix of 60/40 growth-to-income. Nevertheless, it is instructive to view how the assets that I have been using throughout 2014 have performed year-to-date:
| Year-To-Date Results For Barbell Assets | ||||||
| YTD % | ||||||
| SPDR Select Sector Health Care (XLV) | 15.1% | |||||
| First Trust Techology Dividend (TDIV) | 9.1% | |||||
| iShares USA Minimum Volatiltiy (USMV) | 6.9% | |||||
| Vanguard High Dividend Yield (VYM) | 6.8% | |||||
| iShares S&P 100 (OEF) | 6.5% | |||||
| iShares MSCI All Country Asia Ex Japan (AAXJ) | 1.8% | |||||
| Vanguard Extended Duration (EDV) | 31.7% | |||||
| Vanguard Long Term Bond (BLV) | 16.2% | |||||
| SPDR Nuveen Muni (TFI) | 8.7% | |||||
| iShares Intermediate Credit Bond (CIU) | 3.6% | |||||
| Year-To-Date Benchmarks | ||||||
| Vanguard Total Bond (BND) | 5.0% | |||||
| SPDR S&P 500 (SPY) | 6.1% | |||||
| iShares Russell 2000 (IWM) | -6.3% | |||||
Clearly, the S&P 500 SPDR Trust (SPY) performed remarkably well in 2014. For improved risk-adjusted rewards, it could easily have been paired with Vanguard Total Bond (BND). That said, is it advisable to eschew diversifying with small-caps, foreign stocks, high yield bonds and other asset classes? Year-to-date, yes… avoiding small-cap U.S. stocks and foreign developed stocks has been sensible. Yet the best combination of assets at this moment continues to be barbell assets – longer-term bond ETFs, large-cap stock ETFs and low beta stock ETFs.
The barbell approach is not perfect nor is it intended for everyone. It is not a buy-n-hold recipe for success either. Instead, as bull markets mature, I tend to sell small-caps, riskier stock sectors and a variety of struggling assets in the middle of the risk spectrum. This is not to suggest that they cannot perform. I am suggesting that they are less worthy of the risk. It follows that my stock allocation shifts primarily to the largest-cap corporations, while my bond allocation shifts toward safety over income potential.