Barbell

AAA

DEFINITION of 'Barbell'

An investment strategy primarily applicable to fixed-income investing, in which half the portfolio is made up of long-term bonds and the other half comprises very short-term bonds. The “barbell” term is derived from the fact that this investing strategy looks like a barbell, heavily weighted at both ends and with nothing in between. The barbell strategy is also increasingly used with reference to stock portfolios and asset allocation, with half the portfolio anchored in defensive, low-beta sectors or assets, and the other half in aggressive, high-beta sectors or assets. The barbell strategy in fixed income is the opposite of a “bullet” strategy, in which the portfolio is concentrated in bonds of a particular maturity or duration.

INVESTOPEDIA EXPLAINS 'Barbell'

The barbell strategy attempts to get the best of both worlds by combining low-risk and high-risk assets and getting better risk-adjusted returns in the process.

The barbell is an active form of portfolio management, since the short-term bonds must be continuously rolled over into other short-term instruments as they mature. As well, the weightings for the bonds or assets on either side of the barbell are not fixed at 50%, but can be adjusted to market conditions as required.

For example, an asset allocation barbell may consist of 50% safe, conservative investments such as Treasury bills and money market instruments on one end, and 50% high-beta investments – such as emerging market equities, small- and mid-cap stocks, and commodities – on the other end. If market sentiment is very bullish, as for example at the beginning of a broad rally, the investments at the aggressive end of the barbell will typically perform well. As the rally proceeds and market risk rises, the investor may wish to book gains and trim exposure to the high-beta side of the barbell. The investor would therefore sell, for example, 5% of the high-beta portfolio and allocate the proceeds to the low-beta end, so that the allocation is now 45% (high-beta) / 55% (low-beta).

Barbell strategy advantages include offering better diversification than a bullet approach, and reducing risk while retaining the potential to obtain higher returns. One drawback of the barbell strategy is that it eschews the middle road, such as intermediate-term bonds in a fixed-income barbell, and medium-risk investments in a stock or asset allocation barbell. This may not be the best course of action at certain times of the economic cycle when intermediate-term bonds and medium-risk investments tend to outperform.

RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Bond Yield

    The amount of return an investor will realize on a bond. Several ...
  3. Fixed-Rate Bond

    A bond that pays the same amount of interest for its entire duration. ...
  4. Series I Bond

    A non-marketable, interest-bearing U.S. government savings bond ...
  5. Continuous Bond

    A financial guarantee commonly used in international trade that ...
  6. Hospital Revenue Bond

    A type of municipal bond to support the construction of new hospitals ...
RELATED FAQS
  1. What is a barbell fixed-income strategy?

    A barbell fixed-income strategy is an investment strategy in which a portfolio is comprised of long- and short-term bonds. ... Read Full Answer >>
  2. What is a triple tax-free municipal bond?

    At its core, a triple tax-free municipal bond is just like any corporate bond: it is a debt instrument, a loan given to a ... Read Full Answer >>
  3. When diversifying a bond portfolio, you should make sure to take into account all ...

    a. Maturity dates b. Price c. Geographic location d. Credit quality Answer: B Credit quality, time to maturity, and location ... Read Full Answer >>
  4. Calculate the total return of the municipal bond described below.

    Jane and Fabbio Salvatore have just discovered that a Fabulous Florence municipal bond will be offered to support a bridge ... Read Full Answer >>
  5. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  6. How does the bond market react to changes in the Federal Funds Rate?

    The bond market is highly sensitive to changes in the federal funds rate. When the Federal Reserve increases the federal ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  2. Bonds & Fixed Income

    Perpetual Bonds: An Overview

    A perpetual bond makes interest payments to the investor forever. This type of bond holds a certain appeal to both the issuer and buyer.
  3. Bonds & Fixed Income

    The Wonders Of Convertible Bonds

    Ever wondered what exactly a convertible bond does? Read the features of a convertible bond and learn how important the conversion factor is to you as an investor.
  4. Bonds & Fixed Income

    Know Your Cost Basis For Bonds

    Nobody likes taxes, but tax reporting is an inevitable and unavoidable part of investing. If you buy stock, determining your costs basis is a slightly frustrating but fairly straightforward exercise. ...
  5. Mutual Funds & ETFs

    Why You Should Invest In Municipal Bond ETFs

    These versatile instruments have become popular with investors in higher tax brackets and fill a specific niche in the wide selection of fixed-income offerings.
  6. Trading Systems & Software

    How To Analyze Corporate Bonds With Bloomberg Terminals

    Bloomberg was originally designed as a tool for bond traders, and as such it's capabilities for analyzing corporate bonds are extremely robust.
  7. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  8. Fundamental Analysis

    Present Value Interest Factor of Annuity (PVIFA)

    PVIFA can be used to calculate the present value of a series of annuities by considering cash flows and depreciation.
  9. Investing Basics

    Explaining Bond Ratings

    A bond rating is a grade given to a bond to indicate its creditworthiness.
  10. Investing Basics

    How To Create Capital Protected Investment Using Options?

    Does "Capital-Protection" guarantee in an investment product sound attractive? Wait! Here's how you can create a better one for yourself, at low-cost!

You May Also Like

Hot Definitions
  1. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  2. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  3. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  4. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  5. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  6. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!