A Different Kind Of Barbell

ETF.com asked a provocative question. Are Financial Advisors Lazy To Recommend Active ETFs? It was a thin article that came down to advisors knowing their limitations which is of course useful for anyone in any of their endeavors. 

Also noted was what the world looked like 30 years ago when the author worked as an advisor. There were just a couple of ETFs, some index mutual funds but the landscape was dominated by old style active mutual funds. 

There has now been a proliferation of actively managed ETFs but not all of them are active in the traditional sense of stock picking and trying to outperform markets. The YieldMax ETFs are considered actively managed but the sought after outcome is to track a stock or narrow basket to generate a very high income. The Nvidia YieldMax ETF is going to track the underlying to a great extent. If the common goes down 20%, the corresponding YieldMax fund won't somehow magically have its price go up 10%.

Instead of active or passive, I long focused on the intended outcome of a fund/strategy and whether it meets that expectation. Here's a good example with an old, old name, the Fidelity Magellan Fund (FGMAX). It is a straightforward tries to beat the market stock picking fund which it usually does to the upside. The tradeoff is that it usually goes down more when the market goes down including so far in 2025.

This observation is not infallible, nothing is, but it's pretty reliable. You can play around with it yourself on testfol.io. You'd expect Magellan to be more volatile than just an index fund, which it is even if it's not like trying to hold onto a fire cracker. In terms of portfolio construction, buying something like Magellan adds volatility versus balancing that against some other holding that would typically lower volatility like maybe something from the utilities sector or consumer staples. 

Pivot to an article in Barron's about hybrid target date funds offered in 401k plans where upon retirement (minimum age might be 65), some or all of the balance can be converted into an annuity. The usual caveat, I am not an annuity salesman, I've never sold an annuity and the negatives to me outweigh the positives but I can see where the income stream would be reassuring. 

I would argue there are far fewer drawbacks to building something akin to a normal portfolio, probably not 60/40 where the 40 is in bonds with duration as we say repeatedly here but you get the idea. 

I continue to be intrigued by the idea of barbelling income where a big chunk of the portfolio's income comes out of a small portion of the portfolio. Things like the YieldMax funds strike me as being capable of malfunctioning so I am not trying to sugarcoat that risk. As Dave Nadig will tell you, they return a lot of capital as part of the distributions. I still don't know why that is a bad thing. If, in a made up example, a $1million portfolio is taking $45,000 out as income and $10,000 of it comes from some a small allocation to a crazy high yielder as non-taxable, again I don't see that as bad. 

Here's a slightly different version of how we've talked about this idea before.

I don't think we've allocated that much to PUTW in previous posts but despite the risk of put selling when the market goes down, not sugarcoating that risk either, we can see the extent to which it's kind of tracked the S&P with a yield that has been rising in recent years.

Something that can compound positively despite paying out a large distribution is worthy of consideration in this conversation. PUTW has gone down less than the market in some events but has fared worse in other events including YTD 2025. The odds of a malfunction in PUTW are far less than I believe with the YieldMax funds. I used the Apple YieldMax fund for the backtest because it it the oldest one that doesn't have serious risk beyond normal risks associated with an individual stock. 

I think the Tesla YieldMax fund has serious CEO risk beyond the company executing for example. Companies like Amazon, Meta, Google or Netflix to name a few are not obvious candidates for a catastrophic outcome. They might do well or do poorly and based on history, if the S&P 500 goes down 40% I would expect those names to go down more but they aren't going to disappear due to their own bad decisions or obsolescence in the next few years. May it will be different 15 or 20 years, who knows?

The performance is adequate, the test is short because of APLY but the yield is pretty interesting.

If dividends are not reinvested, the Barbell Yield compounded at 8.07%. Barbell Yield has enough in equities that it will compound positively if the broad market is compounding positively. Client/personal holding BTAL helps smooth out the ride a little as might SCHD. The income funds are clearly not riskless but they are not volatile and they are short dated. You could split those up further if you wanted to derisk the income sleeve more than that. 

APLY, or any other YieldMax fund should certainly be expected to erode considerably but the other 95% of the portfolio is likely to compound at a higher rate than the 5% to APLY will erode. If APLY malfunctions catastrophically, the hit should be manageable for the very small starting weight. And of course, 5% in APLY could be 1% in five different YieldMax funds to mitigate idiosyncratic risk. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.