A Look at Business Development Company ETFs

ETF Trends

BDCs (Business Development Companies) have come up more in investment rhetoric in recent years and are now present in investable ETF form in such themed products. BIZD (Market Vectors BDC Income ETF, Expense Ratio 0.40%) is the newest entrant to the marketplace, debuting just last month.

Two ETNs dedicated to the space launched in 2011, BDCS (E-TRACS Wells Fargo Business Development Company Index, Expense Ratio 0.85%) and BDCL (E-TRACS 2X Leveraged Long Wells Fargo Business Development Company Index, Expense Ratio 0.85%, both providing exposure to a broad index of publicly traded business development companies, and the latter designed to provide leveraged long exposure.

With these products trading at all-time highs, and in the case of BDCS boasting a current annual yield of 7.63% and BDCL of 15.65% (remember though this is a leveraged long product and not designed as buy and hold) it is surprising that the space has not caught on with more institutional ETF managers (BDCL has approximately $89 million in AUM followed by BDCS with $27 million and the new BIZD has $3 million in seed capital). [New Business Development ETF]

According to the E-TRACS fund literature, the “BDC business model is to lend to small and midsized companies at high equivalent rates while also at times taking equity stakes in such companies.”

Furthermore, “the combination of making loans and taking equity stakes has the potential for relatively high, stable cash distributions with the additional benefit of capitalizing on the equity performance of the borrower.”

Which publicly traded entities are important in terms of this BDC space, as we imagine that most of these securities are hardly “household” names, even to many portfolio managers with ETF expertise. Top holdings in BDCS are currently: ARCC (10.16%), PSEC (9.86%), ACAS (8.74%), AINV (8.07%), and FSC (6.68%), with twenty eight individual holdings in the underlying index.

With clear signs out there that investors are still searching for yield in portfolios (not to mention capital appreciation), we imagine that the launch of BIZD to the BDC segment of the ETF marketplace will not be the last in this growing sub-sector.

E-TRACS Wells Fargo Business Development Company Index

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For more information on Street One ETF research and ETF trade execution/liquidity services, contact Paul Weisbruch at pweisbruch@streetonefinancial.com.

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