Market Vectors, a US-based provider of exchange-traded funds (ETFs), has launched the Market Vectors BDC Income ETF (BIZD), the first ETF designed to provide pure-play exposure to US business development companies (BDCs). The fund has been listed on the NYSE Arca.
BDCs are known for their high dividend payouts.
The principal business of BDCs is to lend capital to privately-held companies or thinly-traded US public companies.
BDCs are known for their high dividend payouts and offer private investors a chance to obtain the kinds of returns on senior secured debt, private equity, mezzanine loans, and other esoteric layers of the capital structure traditionally only available to institutional investors.
Brandon Rakszawski, product manager for Market Vectors ETFs, said: “Business development companies have traditionally been high yielding, making them an attractive choice in today’s ongoing search for income. Investing in BDCs provides exposure to private companies that many investors could not otherwise access, allowing for potential growth and yield generation.”
The fund seeks to replicate the price return and yield of the Market Vectors US Business Development Companies Index, a rules-based index intended to track the overall performance of publicly traded BDCs. To be eligible for the index, a BDC must have a market capitalisation in excess of $150 million, a three-month average daily trading volume of at least $1 million, and a minimum trading volume of 250,000 shares each month in the previous six months.
The index currently has 25 constituents, the top five of which are Ares Capital (15.98%), American Capital (15.23%), Prospect Capital (7.40%), Apollo Investment (6.08%) and Triangle Capital (4.86%). Its dividend yield is a chunky 7.90%.
Investment of this kind is not without risks. Investing and lending to private companies and thinly traded securities of public companies, including the debt instruments of such companies, makes BDCs potentially susceptible to issues arising out of bankruptcies or defaults. Additionally, limitations on asset mix and leverage may make it difficult for BDCs to raise capital and BDCs may be more adversely affected by market volatility than more diversified investments.
The fund has a direct expense ratio of 0.40% pa. However, in addition to this direct expense, an SEC rule requires a fund of funds (of which BIZD is classified) to report a total expense ratio that accounts for both the expenses that a fund pays directly out of its assets, as well as the expense ratios of the underlying funds in which it invests. This disclosure is designed to provide investors with a better understanding of the actual costs of investing in a fund that invests in other funds, which have their own expenses. Accordingly, the combined expenses are expected to be 7.56%.
Investors looking for an alternative product in this space could consider the UBS-issued ETRACS Linked to the Wells Fargo Business Development Company Index ETN (BDCS), which offers a income yield of 9.78% (before fees), or the double-leveraged ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index ETN (BDCL), which pays out approximately twice this yield. These NYSE Arca-listed exchange-traded notes are based on the Wells Fargo Business Development Company Index, an index reflecting the performance of 26 leading BDCs.