Find Your ETF Balance in a Mature Bull Market

Here's how to use the barbell strategy for your ETF portfolio

I did not invent the barbell strategy. At the start of the year, I simply offered readers a glimpse into the way that I would be managing ETF assets in the late-stage bull market.

First, let me take you back to January when I explained that long-term rates would fall, not rise. The contrarian call had been met with ridicule at the time. Allocate a percentage of portfolio assets to long-term investment grade debt? Fans of the ProShares Ultra-Short Lehamn 20+ Year Treasury ETF (TBT) insisted rates could only go up.

However, there were folks who did appreciate my premise. Specifically, foreign governments and institutional money would be clamoring for a dwindling supply of intermediate- and longer-term U.S. bonds. Then, mix in the uncertainty of the Federal Reserve’s exit from quantitative easing (QE) during a period of extraordinary weakness in the global economy. Suddenly, safety-seekers would be contributing to the demand side of the equation. Last, but certainly not least, U.S. Treasuries were (and still are) relatively attractive when compared to the yield on the debt of less stable countries.

My prescription in 2014? Exchange-traded trackers like Vanguard Long-Term Bond ETF (BLV), Vanguard Extended Duration ETF (EDV) and Pimco 25 Year Zero Coupon U.S. Treasury Index Fund ETF (ZROZ). Those who valued my analysis expressed gratitude in comments, e-mails and hypertext links back to my articles. In contrast, when bonds puled back sharply two weeks ago, a belligerent stalker of financial authors sarcastically admonished my choice of extended duration treasury bonds.

The fact that the long-term bond holdings were not my solitary conviction is important to note. More accurately, they have always been a component of a barbell approach.

For example, a number of my clients have 60% in lower beta risk stock assets such as Vanguard High Dividend Yield ETF (VYM), iShares USA Minimum Volatility (USMV), iShares S&P 100 Index ETF (OEF), First Trust Technology Dividend (TDIV) and/or SPDR Select Sector Health Care ETF (XLV).

I even incorporated emerging market Asia via iShares MSCI All Country Asia Ex Japan ETF (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 real estate investment trusts.

(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 in the context of a 60/40 barbell strategy:

Year-To-Date Results For 60/40 Barbell
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%
Hypothetical Returns In 2014 10.6%
SPDR S&P 500 Trust (SPY) 6.1%
Vanguard Total Bond (BND) 5.0%

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-cap stocks, 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.

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Disclosure StatementETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETFExpert website. ETF Expert content is created independently of any advertising relationship.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/manage-etfs-etf-balance-barbell-strategy-mature-bull-market/.

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