Fixed-income investors may be wary about the negative effects of a rising rate environment. However, in the equities space, exchange traded funds that follow business development companies may be more insulated from rate risk and offer some attractive yields.
For instance, the Market Vectors BDC Income ETF (NYSEArca: BIZD) has a 8.52% 12-month yield. Additionally, the exchange traded note UBS E-TRACS Wells Fargo Business Development Index ETN (NYSEArca: BDCS) has a 8.12% 12-month yield and UBS E-TRACS 2x Wells Fargo Business Development Company Index ETN (NYSEArca: BDCL), which takes the leveraged 200% performance, has a 19.56% 12-month yield.
According to Wilshire Associates, BDCs have an average yield of over 10%, compared to 3.8% for real estate investment trusts and utilities or the 2% for the S&P 500 index, writes Jeff Benjamin for InvestmentNews.
Business development companies, or BDCs, are closed-end investment companies that invest in debt and equity of small public and privately held companies. Robert Waid, managing director at Wilshire Analytics, points out that BDCs offer attractive income opportunities since they required to pay out 90% of income in form of dividends.
While the BDCs may offer high yields, potential investors should be aware that yields come with high credit risks. BDCs act as an alternative to bank loan debt, helping smaller companies grow and profiting off the investments. Since the debt is typically senior secured and set to float with interest rate benchmarks, there is diminished rate risk.
“BDCs take credit risk, not interest rate risk, so they benefit from rising interest rates,” Zachary Klehr, executive vice president of Franklin Square Capital Partners, said in the InvestmentNews article.
However, some observers are wary about BDCs’ internal fee structure. For instance, the Russell and S&P indices have booted BDCs from their indices due to accounting and reporting requirements and expenses. Specifically, business development companies are required to disclose 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]
Wilshire recently launched the Wilshire BDC Index Wednesday, which Benjamin suggests could pave the way for an investible product soon.
BIZD tracks 29 BDCs from the Market Vectors US Business Development Companies Index while the UBS E-TRACS ETNs are based off the Wells Fargo Business Development Company Index.
For more information on BDCs, visit our business development companies category.