How Active ETFs May Enhance High Yield Bond Investing
Investors accessing high yield bond markets via active exchange-traded funds (ETFs) may enjoy the benefits of potentially generating greater income and doing so through a liquid, transparent and market-efficient vehicle. Additionally, intraday pricing reflects actionable market trading conditions, allowing actively managed ETFs to potentially offer more accurate pricing compared to mutual funds, which price at the end of the day.
Opportunities in High Yield
The high yield universe has shown strong performance following early liberation day uncertainty in April. The US High Yield market gained for the fifth consecutive month in September, for example, while the effective yield on the ICE BofA Euro High Yield Index fell to below five percent in mid-September 2025 from 6.3% following early April’s initial tariff announcements. In terms of spreads, corporate bonds in both high yield and investment grade indices are at their tightest in years.
Yet, despite consternation over tight spreads, we think that the asset class could remain a potential source of income and alpha generation. For one, issuers have continued to show solid fundamentals despite wider uncertainty. Companies are also looking to improve the health of their balance sheets by moderating spending; in 1Q 2025, capital expenditure by high yield companies fell year-on-year for the sixth consecutive quarter.1
In our view, this rise in credit quality over the past three years can be attributed to several factors, including:
- Post COVID-19 defaults have strengthened the index composition
The overall creditworthiness of the high yield space has improved. An uptick in defaults during and after the pandemic saw several companies leave the index, effectively shifting the index’s weighting towards higher-rated names. For example, BB-rated credits in US high yield now make up more than 50% of the market, compared with less than 40% back in 2011.2 - More robust underwriting environment
In our view, the underwriting, financing and due diligence environment is much more robust than it was during previous periods of financial stress, with debt holders in high yield now likely to be more resilient to potential downturns than previously. - Mergers & Acquisitions pickup has curbed defaults
An increase in acquisition activity in the distressed space pushed down the number of defaults, which in turn limited the supply of lower-rated or unrated paper. - Less-creditworthy issuers shifting to private credit
Smaller issuers previously in the high yield market have shifted toward off-platform solutions. This has meant those issuers remaining in high yield indices are of typically higher credit quality, strengthening the overall fundamental backdrop of the asset class as a whole.
The Potential Benefits of Active High Yield
We believe these positive tailwinds for high yield markets can be complemented by an active management approach which places a keen eye on in-depth, forensic research informing security selection. Active high yield investing may be advantageous for investors, depending on their risk tolerance and objectives, by helping them invest in a bespoke manner and potentially respond to market events quicker than passive indexes.
Active management isn't just about picking the winners in the asset class; it is also about using fundamental research to avoid names that could potentially deteriorate, something that passive indexes do not have the ability to do. Passive indexes can be more prone to these relatively bigger loss makers as they tend to favor higher-value companies with likely higher debt levels. This may lead to a lack of diversification, which we think is particularly important in a higher credit risk asset class.
Meanwhile, active managers may seek additional returns through off-benchmark investments not available to index funds. The ability of active high yield managers to avoid the biggest losers, in addition to identifying the biggest winners, is one reason they have historically outperformed passive high yield ETFs.
Source: Goldman Sachs Asset Management, Morningstar. As of June 2025.This does not represent performance of any GS product. Past performance does not predict future returns and does not guarantee future results, which may vary. For illustrative purposes only.
The rise of active ETFs has been one of the hot-button topics of the year. This is particularly acute in fixed income, with active investing in the asset class accounting for 35% of ETF flow globally.3 We think investors considering placing active high yield within an ETF wrapper can also add efficiency, liquidity and transparency typically not associated with non-investment grade markets.
How Active ETFs Can Support High Yield Investors
High yield ETF prices can incorporate information about new market clearing levels – or the equilibrium price – continuously because they trade intraday, and ETF prices reflect prices at which market participants are willing to transact. By contrast, open-end mutual fund shares price once per day, and are typically based on external pricing service evaluations. Given that only a small fraction of outstanding high yield debt trades on any given day, these quotes tend to be lagging. The effect of this lag is particularly acute and evident during times of stress. ETF secondary market pricing has also historically been correlated with future NAV/index prices changes (see below).
Source: Goldman Sachs Asset Management, Bloomberg. As of 31 August 2025. This does not present any GS product and shown for educational, illustrative purposes only.
Source: Goldman Sachs Asset Management, Bloomberg. As of 31 August 2025. This does not represent any GS Product and is shown for educational, illustrative purposes only. Past performance does not predict future returns and does not guarantee future results, which may vary.
Seeking Balance in Uncertainty
ETF primary market mechanics are designed to help preserve portfolio balance in times of market stress, particularly salient in the high yield space where liquidity has historically been at a premium. ETFs generally use in-kind creations and redemptions with authorized participants, meeting outflows with a representative basket of portfolio securities rather than selling directly into the market. This helps the ETF maintain exposure without overconcentrating in less liquid names, supporting more resilient high yield exposure through volatile periods, for example, through the initial months of the coronavirus pandemic which caused significant market volatility.
Daily Disclosure of Holdings Matters
ETFs offer greater transparency given the requirement for daily disclosure, allowing investors to monitor sector and issuer exposure at a granular level. This is crucial in the high yield space, where defaults tend to cluster in select industries. For example, the move to rising interest rates in 2022 led to a series of defaults in rate-sensitive sectors such as real estate.
How Investors May Access High Yield Through Active ETF Management
The growth of active ETFs in the fixed income space will continue, in our view, given active management’s existing prevalence in fixed income portfolios; for instance, 70% of all fixed income assets in mutual funds and ETFs are actively managed.4 This growth could add further support to the high yield marketplace, given it is an asset class traditionally supported by active management and one that could benefit from the liquidity options ETFs can provide. We believe this approach can provide the following potential benefits:
- Active ETFs give investors a potential opportunity to generate risk-adjusted returns in a high yield marketplace that previously could have been too cost-prohibitive or illiquid to access.
- Solid underlying fundamentals and positive ratings momentum, alongside a supportive macroeconomic and monetary backdrop, can offer investors a potentially attractive entry point into the high yield market, in our view. We believe this is particularly acute at a time when the Federal Reserve is resuming its rate-cutting cycle which will likely push yields lower over the next year or so; we anticipate four more cuts before the end of 2026.
- We believe active management is key for investors to consider when looking to access high yield securities via an ETF wrapper. It allows managers to adapt quickly in times of market stress to help manage downside risk, as well as take off-benchmark positions in high-conviction names. By contrast, passive indexes could become overconcentrated in higher-risk names as well as miss out on potential alpha opportunities.
1 Source: JP Morgan, S&P Capital IQ, as of 31 March 2025
2 Source: ICE BofA US High Yield Index, as of September 30, 2025
3 Source: Bloomberg, as of September 26, 2025.
4 Source: Morningstar
