What is YLD? (Pros, Cons, and Strategies)

If you're looking for a way to enhance your investment portfolio with high-yield income, Principal Active High Yield ETF, commonly known as YLD, might be a great option. This ETF is aimed at providing investors with high yields through exposure to various fixed-income securities. In this blog post, we'll delve into what YLD is, its advantages, and disadvantages, as well as some effective strategies for investing in YLD.

What is YLD?

YLD stands for Principal Active High Yield ETF. It’s an actively managed exchange-traded fund designed to generate high income by selectively investing in a diversified portfolio of high-yield fixed-income securities. Unlike many ETFs that passively track an index, YLD employs a dynamic strategy to select assets that meet certain criteria.

Key Features of YLD

• Actively Managed: YLD doesn't follow a set index; instead, professional managers actively select high-yield bonds and other fixed-income securities.
• Diversified Portfolio: The ETF invests in a wide range of sectors and industries, mitigating the risks associated with individual securities.
• Focus on Income: The main goal of YLD is to provide high income through interest payments from the bonds and other securities it holds.

YLD Composition

YLD consists primarily of high-yield corporate bonds but also includes other types of fixed-income investments like mortgage-backed securities and foreign bonds. This diversification helps in spreading the risk while maintaining high yield potential.

Pros of YLD

High Income Potential

One of YLD's biggest advantages is its high yield. By targeting high-yielding bonds and other fixed-income securities, it aims to provide investors with a substantial income stream, making it particularly attractive to income-focused investors.

Professional Management

Unlike passive ETFs, YLD benefits from active management by financial professionals who can adjust the portfolio to respond to changing market conditions. This dynamic approach helps in mitigating risks and exploiting opportunities as they arise.

Diversification

YLD includes a variety of fixed-income securities from different sectors and industries, which means it’s not overly reliant on any single source of income. This diversified approach helps in mitigating risks associated with bond defaults or sector downturns.

Cons of YLD

Higher Expense Ratio

The active management of YLD comes at a cost. It generally has a higher expense ratio compared to passively managed ETFs. These fees can eat into your returns, particularly over the long term.

Credit Risk

Since YLD invests heavily in high-yield bonds, it is exposed to credit risk. High-yield bonds, often referred to as "junk bonds," come with a higher risk of default. This can result in volatility and potential losses.

Interest Rate Risk

YLD is sensitive to changes in interest rates. When interest rates rise, the value of existing bonds tends to fall, which can negatively impact the ETF's performance.

YLD Investment Strategies

YLD offers a lucrative opportunity for income, especially for those who understand how to leverage it effectively. Here are some strategies to consider:

Income-Focused Strategy

For investors seeking regular income, YLD can be an excellent addition to the portfolio. By reinvesting the income generated from YLD, you can take advantage of compounding returns over time.

Diversification Strategy

YLD can serve as a diversification tool within a broader portfolio. Since it focuses on high-yield fixed-income securities, it can compensate for the lower yields typically found in other conservative investments like government bonds.

Long-term Investment Strategy

Given the risks associated with high-yield bonds, YLD is more suited for long-term investment horizons. This allows time for the portfolio to recover from any short-term volatility and take full advantage of the high income over the long run.

Conclusion

YLD provides a compelling option for investors looking to enhance their income through high-yield fixed-income securities. While it comes with its share of risks and higher costs due to active management, its potential for high income, diversification, and professional management make it a valuable addition to any income-focused portfolio. Whether you’re looking for immediate income or a long-term investment, understanding how to incorporate YLD into your strategy can yield fruitful results.