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Today’s strategic entry point

Case for high yield

March 13, 2025 | 4 min read
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Some investors tend to focus on spreads as a guide for when to enter and exit the high yield asset class. Rather than timing spreads, we believe investors should focus on the income that high yield can provide over the long term.

Explore Principal Active High Yield ETF

Yield-to-worst and forward 5-year annualized return

Average yield-to-worst: 8.75%
Average forward 5-year annualized return: 7.26%
Correlation: 0.84
Bar chart showing yield-to-worst and forward 5-year annualized return.
Yield-to-worst
Forward 5-year annualized return

Source: Bloomberg. As of December 31, 2024. Data is representative of the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index. Past index performance is not a reliable indicator of future performance.

Correlation: Statistical measure that describes the relationship or connection between two variables and indicates how strongly they are associated with each other. The higher the number, the stronger correlation; 1 indicates a perfect positive correlation and 0 indicates no linear relationship between the variables. The relationship measured here is between average yield-to-worst and forward 5-year annualized return.

Yield-to-worst: Yield to worst (YTW) is a financial metric that estimates the lowest possible return on a bond. It's used to assess the risk of a bond investment. 

Credit spreads: The difference in yield between two bonds of similar maturity but different credit quality typically measured as the difference between a corporate bond yield and a risk-free government bond yield of the same maturity.

Principal Active High Yield ETF performance

Total returns % Yields %
YTD 1-year 3-year 5-year 30 day (Unsubsidized/subsidized)1
Net asset value (NAV) return 9.06 9.06 4.08 4.62 7.08/7.08
Market price return 9.19 9.19 3.99 4.57 -
Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index 8.19 8.19 2.92 4.19 -

Source: State Street and Principal Global Investors. As of December 31, 2024.

1 The 30-Day SEC Yield represents net investment income earned by a fund over a 30-day period, expressed as an annual percentage rate based on the fund’s share price at the end of the 30-day period. It is calculated based on the standardized formula set forth by the SEC. It is designed to standardize the yield calculation so that all exchange traded fund companies with the same or similar portfolios use a uniform method to obtain yield figures.

Performance data quoted represents past performance. Past performance is no guarantee of future results and investment returns, and principal value of the Fund will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance quoted. View current month end performance.

Increased credit quality & risk-adjusted returns

Long-term investors may benefit from the increased credit quality and risk-adjusted returns of the high yield asset class. The credit profile of the high yield asset class has been consistently improving, as CCCs now account for about half as much of the asset class as they did 15 years ago. Additionally, high yield bonds have the highest Sharpe ratio among traditional fixed income asset classes.

High yield market BB & CCC composition

Line graph showing high yield market BB & CCC composition.
BB market value (%)
CCC market value (%)

Source: Bloomberg. As of December 31, 2024. Data is representative of the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index.

15-year annual return and Sharpe ratio

Bar chart showing 15-year annual return and Sharpe ratio.
15-year annual gross return (LHS)
15-year Sharpe ratio (RHS)

Source: Bloomberg. As of December 31, 2024. Past index performance is not a reliable indicator of future performance. See last page for index descriptions.

Sharpe ratio: Measures an investment's risk-adjusted return. It calculates how much excess return (or "risk premium") you receive for the additional volatility of holding a riskier asset or portfolio.

Bond ratings: Standardized evaluations of credit quality assigned to bonds by rating agencies (primarily Moody's, Standard & Poor's, and Fitch). These ratings indicate the likelihood that the bond issuer will repay their debt obligations. The main rating scales typically range from: AAA/Aaa (highest quality, lowest risk), AA/Aa, A/A, BBB/Baa, BB/Ba, B/B, CCC/Caa, D (default). Bonds rated BBB-/Baa3 or higher are considered "investment grade," while those rated below are called "high yield" or "junk bonds." 

Left-hand-side (LHS): Axis is on left. Right-hand-side (RHS): Axis is on right.

Active management: Balancing risk & return

To fully participate in the asset class’s yield and return potential, investors need exposure to the lower-rated credit bucket—that’s where a large portion of yield resides. Lower credit ratings have higher default risk, which can potentially be mitigated through active management focused on protecting the downside.

Consider Principal Active High Yield ETF

Yield, credit quality, and default risk

Bar chart and line graph showing yield, credit quality, and default risk.
Current yield-to-worst
Annual default rate

Source: Aladdin, Moody’s. Annual issure-weighted corporate default rates by letter rating, 1920-2023 for the Bloomberg U.S. High Yield 2% Issuer Capped Index.

Bond ratings: Standardized evaluations of credit quality assigned to bonds by rating agencies (primarily Moody's, Standard & Poor's, and Fitch). These ratings indicate the likelihood that the bond issuer will repay their debt obligations. The main rating scales typically range from: AAA/Aaa (highest quality, lowest risk), AA/Aa, A/A, BBB/Baa, BB/Ba, B/B, CCC/Caa, D (default). Bonds rated BBB-/Baa3 or higher are considered "investment grade," while those rated below are called "high yield" or "junk bonds."

Flexible, focused portfolio of high-yield ideas

It’s hard to find yield without taking risk. Our high-conviction, total-return approach seeks to provide attractive income with competitive pricing while actively managing risk.

Our actively managed, high yield portfolio may help investors looking to:

  • add to their credit allocation to meet income needs.
  • replace passive ETFs, active funds, and riskier loans or private credit that have declined in quality.
  • harvest tax losses from high yield strategies with negative returns while maintaining market exposure.

Consider Principal Active High Yield ETF

Looking for other ways to put cash to work?

Seek income and optimize yield.

Explore more income ideas

Fixed income
Disclosures

Index descriptions

Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index is an unmanaged index comprised of fixed rate, non-investment grade debt securities that are dollar denominated. The index limits the maximum exposure to any one issuer to 2%.

Bloomberg U.S. Corporate High Yield Bond Index (High Yield) measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.

Bloomberg U.S. Treasury Index (Treasurys) measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. STRIPS are excluded from the index because their inclusion would result in double-counting.

Bloomberg U.S. Mortgage Backed Securities (MBS) Index (Mortgages) tracks fixed-rate agency mortgage backed pass-through securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage.

Bloomberg U.S. Aggregate Index (U.S. Agg) is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

Bloomberg U.S. Corporate Investment Grade Index (IG Corporate) measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by U.S. and non-U.S. industrial, utility, and financial issuers.

© 2025 Morningstar, Inc. All rights reserved. Part of the data contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Risks

Carefully consider a fund’s objectives, risks, charges, and expenses. Contact your financial professional or visit www.PrincipalAM.com for a prospectus, or summary prospectus if available, containing this and other information. Please read it carefully before investing.

All figures shown in this document are in U.S. dollars unless otherwise noted. All assets under management figures shown in this document are gross figures and may include leverage, unless otherwise noted. Assets under management may include model-only assets managed by the firm, where the firm has no control as to whether investment recommendations are accepted, or the firm does not have trading authority over the assets.

Asset allocation and diversification do not ensure a profit or protect against a loss. Investing in ETFs involves risk, including possible loss of principal. ETFs are subject to risk similar to those of stocks, including those regarding short-selling and margin account maintenance. Investor shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Ordinary brokerage commissions apply.

Fixed income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of bond investment options nor their yields are guaranteed by the U.S. government. Lower-rated securities are subject to additional credit and default risks. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Investing in derivatives entails specific risks relating to liquidity, leverage, and credit, which may reduce returns and/or increase volatility.

Unlike typical ETFs, there are no indices that the Principal Active High Yield ETF attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager.

ETFs can be tax efficient in that they are exchange-traded and redeem creation units from authorized participants by using redemptions in kind, which are not taxable transactions for the Fund. However, capital gains are still possible in an ETF, and if you reinvest the earnings of the ETF, you may owe taxes on your funds even if you didn’t sell any shares, potentially eating into your returns.

Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could perform worse than the original investment, and that transaction costs could offset the tax benefit. There may also be unintended tax implications.

ALPS Distributors, Inc. is the distributor of Principal ETFs. ALPS Distributors, Inc. and the Principal Funds are not affiliated.

© 2025 Principal Financial Services, Inc., Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc. Principal Asset Management℠ is a trade name of Principal Global Investors, LLC.

MM14238WA | 03/2025 | 4320858-032026 | PRI001687-032026