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S&P Index Changes Pressure BDC ETFs


Business development company-related exchange traded funds are weakening after S&P Dow Jones Indices decided to remove BDCs from its U.S. indices.

The Market Vectors BDC Income ETF (BIZD) , which tracks U.S.-listed BDCs, has dropped 1.6% over the past week. Additionally, BDC-related exchange traded notes, E-TRACS Wells Fargo Business Development Index ETN (BDCS) and UBS E-TRACS 2x Wells Fargo Business Development Company Index ETN (BDCL) , declined 2.0% and 3.5% over the past week, respectively.

S&P kicked out the group due to accounting and reporting requirements and expenses, reports Brendan Conway for Barron’s.

BDCs are required to disclose the so-called acquired fund fees and expenses, which are a type of business expense and not considered “fees” in the way fund investors are familiar with. [Making Sense of Acquired Fund Fees in BDC ETFs]

Looking ahead, industry observers are now waiting from Russell Indexes, which has a heavier stake in the group, on whether or not the index provider will follow S&P’s move. Some BDCs’ ownership in Russell index-related funds see as much as 38 days’ worth of average trading volume.

Wells Fargo analysts Jonathan Bock, Ronald Jewsikow and Gregory Nelson warn that BDC shares will be sold off as a result of the index change, so investors should be ready for technical selling and volatility over the next few weeks.

Nevertheless, Wells remain optimistic about Russell maintaining its BDC exposure as an integral part in representing small-cap stocks.

“Willingness to represent the small cap reality—and the BDCs are a major/growing part of the small cap market,” according to Wells. “Russell Indices receive acclaim because they are willing to provide investors access to the true investable small cap universe. To the extent BDCs are excluded, this would deprive investors the opportunity to invest in what has become a very large/growing industry.”

BDCs are high-dividend-paying firms that focus on lending senior secured loans to midsized companies. These companies act like banks to other companies, but the BDCs are not structured as banks since they pay out at least 90% of income to investors through dividends. BDC-related ETFs are good sources of high dividend yields. BIZD has a 5.43% 12-month yield, BDCS has a 7.08% yield and BDCL has a 14.71% yield. [Generate Yields with BDC ETFs]

Market Vectors BDC Income ETF

For more information on BDCs, visit our business development companies category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.