Principal Investment Grade Corporate Active ETF (IG)

The Principal Investment Grade Corporate Active ETF (IG) is an exchange-traded fund that invests in a portfolio of U.S. investment-grade corporate bonds, with the fund’s performance and composition determined by the active investment decisions of Principal’s fixed-income team rather than by tracking a preset index.

Principal, the asset manager and financial services company behind IG, brings a century-plus legacy in insurance and asset management to its approach to corporate bond selection. Unlike a passive index fund that automatically holds all or a broad sample of investment-grade corporates, IG’s managers make individual security decisions: which bonds to hold, which to overweight or underweight, and how long the portfolio’s duration should be to balance return potential against interest-rate risk. That discretion is the entire appeal — and the entire source of risk — for an active corporate bond fund.

What IG holds and why that structure matters

The fund invests primarily in fixed-rate bonds issued by corporations with strong credit ratings — typically BBB and above, the dividing line between investment grade and speculative grade. The portfolio includes bonds from banks, financial companies, industrials, consumer staples, technology, healthcare, and energy sectors, reflecting the breadth of the U.S. corporate debt market. Principal’s team aims to construct a portfolio that captures the yield premium available from corporate bonds while actively avoiding the weakest credits (issuers likely to default) and overowned, richly priced bonds where the risk-reward has shifted unfavourably.

The key distinction from a passive corporate bond index fund is that IG’s composition changes based on the managers’ judgement. When they see compelling value in a particular issuer’s bonds — perhaps a strong company whose debt has fallen out of favour and now offers exceptional yield — they can build an overweight. When a company’s creditworthiness appears to be deteriorating, they can trim or exit before a broader market repricing occurs. This flexibility is the premise of active management: that skilled assessment of credit quality and valuation can enhance returns beyond what a mechanical index tracking would deliver.

Duration — the weighted average time to maturity of the bonds held — is a critical tool in the fund’s management. A longer-duration portfolio amplifies both upside (when interest rates fall) and downside (when rates rise). Principal’s team adjusts duration based on their view of where rates are headed and where they assess bonds sit on the risk-reward spectrum. In periods when rates are expected to fall, extending duration magnifies gains. When rates appear likely to rise, shortening duration protects against the mark-to-market losses that longer-maturity bonds suffer.

How a dollar of yield gets earned and split

The fund’s return comes from two sources: interest income (the coupon payments from the bonds) and capital appreciation (price gains when interest rates fall or credit spreads narrow). For a bond investor holding to maturity, only the coupon matters; but in an ETF context, the portfolio is marked to market daily, and price movements create the opportunity for both gains and losses.

The expense ratio — Principal’s management fee — typically runs in the 40 to 55 basis-point range, higher than a passive corporate bond index fund but in line with other actively managed corporate bond funds. That fee comes directly out of the fund’s returns each year. If the bonds in the portfolio earn 4% but the expense ratio is 0.5%, the fund’s net return is 3.5% before any capital appreciation or depreciation.

Credit spreads — the extra yield corporate bonds pay relative to Treasury bonds — form a crucial part of IG’s return profile. When investors are fearful and fleeing risk, they widen dramatically, making corporate bonds cheaper. When investors are confident, spreads narrow, boosting total returns. In the early post-pandemic years, spreads compressed to historic tights as central banks kept rates low; in 2023 and beyond, rates rising and default fears have pushed spreads wider, creating more attractive entry points. IG’s managers position the portfolio to benefit when spreads are wide and risky-priced and to reduce exposure when spreads are tight.

The trade-offs and risks that investors face

Active management comes with no guarantee of outperformance. Passive index funds have lower fees and no timing risk; a passive fund automatically owns the whole market, capturing whatever return the market delivers. IG’s managers must beat their benchmark (typically a broad investment-grade corporate bond index) by enough to cover their fees and justify their decisions. In some years — particularly when the market is efficiently priced and concentrated in a narrow set of mega-cap issuers — active managers underperform and investors pay fees for that underperformance.

Interest-rate risk is unavoidable in a bond fund. When the Federal Reserve raises rates, the value of existing bonds falls; IG will post negative returns in such periods, even if the underlying bonds are safe and Principal’s team is making sound decisions. The longer the duration, the more severe the loss. Conversely, when rates fall, the fund benefits disproportionately. For investors with short time horizons or low risk tolerance, rising-rate environments can be painful.

Credit risk remains despite the focus on investment-grade issuers. While default rates in investment-grade corporates are historically low, they are not zero. A severe economic downturn, industry disruption, or company-specific mismanagement can push even investment-grade credits into distress. If IG’s managers miss deteriorating credit quality in their selection process, the fund’s returns suffer. The 2008 financial crisis demonstrated that “investment grade” does not mean risk-free: many corporates that were AAA-rated before the crisis became distressed.

Concentration risk arises naturally in corporate bond markets. The largest issuers — Apple, Microsoft, Google, JPMorgan, banks, and so forth — issue the most debt. A fund that holds a representative sample of the market automatically has large positions in mega-cap issuers. IG’s managers have discretion to tilt away from concentration if they judge it excessive, but they cannot eliminate it entirely without tracking error.

How to research IG

The fund’s prospectus, available from Principal’s website, lays out the investment objective, strategy, fees, and risks. The fact sheet (updated monthly) shows the portfolio’s current duration, average credit rating, sector weightings, and top holdings. Comparing IG’s holdings and weightings to a passive index (such as the Bloomberg U.S. Aggregate Bond Index or an equivalent corporate component) reveals where the active managers are taking risk.

Track the fund’s performance relative to its benchmark over rolling one-, three-, five-, and ten-year periods. Has the fund beaten its benchmark after fees? In which market environments did it outperform and underperform? A fund that consistently lags in rising-rate environments but shines in falling-rate periods tells a story about its duration positioning.

Monitor the yield-to-maturity of the portfolio and Principal’s commentary on credit conditions. In years when credit is tight and yields are low, IG may struggle to deliver compelling returns. In years when spreads are wide and opportunity abounds, IG’s active approach may shine. Listen to the fund’s quarterly fact sheets and annual letters for the team’s view on interest rates, credit quality, and valuation — these reveal the philosophy guiding the portfolio.

Finally, consider IG’s role in a broader portfolio. For an investor building a fixed-income sleeve, IG can serve as the active, overweight-to-opportunity portion of a bond allocation, complemented by passive index holdings in other sectors. Its beta to interest rates is substantial, so bond investors should understand their overall interest-rate exposure across all holdings.