Barbells Aren't Just For Lifting Weights

It's no secret that I think the world of Joe Moglia, former CEO of TD Ameritrade who left that gig to coach college football. It's admirable that he succeeded on two very different fronts, he has good insight into things I am interested in and the impression I get is that he really is a mensch. That does not mean I would agree with him on everything. 

This Tweet was embedded in a thread;

The context in the Tweet before was that he was on Cavuto to talk about an upcoming book and he believes that investing can be simple.  He refers to the example in that Tweet as a "barbell model." 

No question, investing can be pretty simple. I've been exploring the idea of barbelling for more than 15 years here. Just a couple of points on the above tweet. If you're trying to do something as simple as 50% in T-bills now yielding 5% and one equity proxy, don't make that one equity proxy a narrow bet like tech stocks. Keep it to something broad like a total market fund or a market cap weighted large cap index. 

And then just a little math, the "guarantee" based on the 50/50 allocation would be 2.5%

Pivoting to an idea for a barbell equity strategy prompted but a short paper about the Simplify Hedged Equity ETF (HEQT). I mentioned this fund once or twice when it first listed in late 2021. That really isn't enough time to fully understand how it will behave but I do think that time frame starts to show whether a fund might live up to its expectation frequently enough to merit consideration. Remember, no fund or strategy will always "work."

 

HEQT is intended to be less volatile than a MCW index like the S&P 500. Hopefully, for fund holders looking for that attribute it would down less and also go up less. Down less clearly worked in 2022 and YTD HEQT is lagging the S&P 500 by 400 basis points. Again though, the time frame is short, kind of like the cliche about the Tour de France, you can't win it on the first day but you can lose it on the first day. I'd say HEQT has not lost the race on the first day the way some funds come out and completely flounder versus the expectation they set.   

I've talked a bit lately about trying to figure out how to blend different factors together to maybe improve on risk adjusted returns versus MCW or thought of differently, a slight barbelling into one factor or as a third way of thinking about it, maybe trying to build a 75/50 portfolio which gets 75% of the upside, 50% of the downside which if you do the math leads to long term outperformance. 

 

SSO is 2X S&P 500 and SPHB is the Invesco S&P 500 High Beta ETF. 

Portfolio 3 with 65% HEQT and 35% SPHB was down quite a bit less than the S&P 500 last year and the standard deviation is noticeably lower too. YTD through the end of May, Portfolio 3 is trailing the S&P 500 by 72 basis points but the standard deviation for Portfolio 3 in that time is 119 basis points higher than SPX. 

It is way too soon for me to want to draw any conclusion about the validity of this idea, but the short period available to us for study does not immediately invalidate the theory. I'll try to circle back to this periodically to see how it does.

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