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 (NYSEArca: 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 (NYSEArca: BDCS) and UBS E-TRACS 2x Wells Fargo Business Development Company Index ETN (NYSEArca: 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.