Business development companies (BDCs) are typically higher yielding securities and the search for income is one catalyst behind the ascent of the VanEck Vectors BDC Income ETF (NYSEArca: BIZD), which is higher by almost 26% over the past year.
BIZD tries to reflect the performance of the MVIS US Business Development Companies Index, which includes publicly traded BDCs. The ETF has a tempting 30-day SEC yield of over 9%. Business development companies generate robust yields since they are required to pay out 90% of income in the form of dividends, a structure similar to what income investors find with real estate investment trusts, or REITs.
While BIZD’s yield is certainly noteworthy, investors should thoroughly examine the current environment for BDCs before rushing into this asset class.
“A more favorable funding environment and improved equity valuations could lead to improved funding flexibility for some US business development companies (BDCs) in 2017, says Fitch Ratings. Stronger BDCs are likely to become more opportunistic issuers this year as market factors could enhance the attractiveness of issuing unsecured debt. Other challenges remain, however, and Fitch maintains a negative sector outlook,” said Fitch Ratings in a recent note.