Exchange traded funds that track business development companies can provide a robust yield boost to an income-oriented investment portfolio even in a rising rate environment.
BDCs are affected by the internal health of the U.S. economy, and interest rates usually rise with an improving economy, writes Shawn Blau for Forbes.
The BDC industry has also taken steps to shelter against rising rates. The companies have structured about 60% of their assets into floating-rate investments.
BDCs have also capitalized on the low rates, restructuring the majority of their liabilities on fixed-rate terms.
Additionally, BDCs could mirror similar income investments like energy master limited partnerships. MLPs have done well even as interest rates inched higher.
Like MLPs, BDCs were designed as a special subset of investment companies. Due to the way they are structured, BDCs act as tax pass-through entities to avoid double-taxation on dividends.
BDCs lend capital or provide services to privately-held companies or thinly-traded U.S. public companies. Since BDCs have exposure to smaller companies, the companies will be susceptible to potential risks involving bankruptcies or defaults.
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