As investors seek out ways to augment income portfolios, business development company exchange traded funds have popped up on investors’ radars.
For instance, the Market Vectors BDC Income ETF (NYSEArca: BIZD), which tracks U.S.-listed BDCs, shows a distribution yield of 6.93%. [Making Sense of Acquired Fund Fees in BDC ETFs]
Additionally, the E-TRACS Wells Fargo Business Development Index ETN (NYSEArca: BDCS) has a current yield of 7.32%. Unlike ETFs, an underwriting bank backs the exchange traded note, and if the bank goes under, investors could lose their principle. The UBS E-TRACS 2x Wells Fargo Business Development Company Index ETN (NYSEArca: BDCL) provides leveraged exposure to BDCs. While the leveraged aspect exposes investors to greater risk, the ETF offers a robust 15.72% yield. [Investors Seeking Out BDC Stock, ETF Attractive Returns]
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.
While BDCs handle debt instruments, many BDCs have near-zero default rates in their portfolios. By law, the companies are required to maintain low debt levels.
“BDCs tend to lend at floating interest rates while borrowing money at fixed interest rates. So their earnings would increase if floating Libor interest rates were to increase significantly,” Grier Eliasek, president of Prospect Capital, said in a Investor’s Business Daily article. “Bonds yielding fixed rates are expected to suffer losses as interest rates go up.”