High-Yield BDC ETFs to Capture Growth, Diminish Rate Risk | ETF Trends

As more seek out income-generating investments, investors can take a look at alternative high-yielding strategies like business development companies and related exchange traded funds that provide exposure to further U.S. growth and a potential hedge against rising interest rates.

BDCs are a good play on the growing middle America.

“One problem we see is the lack of funding for small businesses,” James L. Copell, Chief Executive Officer of Trust & Fiduciary Management Services, Master Shares, said in a call with ETF Trends. “BDCs, though, lend to small- and middle-sized businesses.”

Almost 200,000 business comprise the U.S. middle market, or about one-third of America’s private sector GDP, reports Michael Kelly for InvestmentNews. However, due to increased banking regulations, it has become harder for banks to lend to private businesses, and that is where BDCs step in.

BDCs act as an alternative to bank loan debt, helping smaller companies grow and profiting off the investments. In an expanding economic environment, BDCs should also benefit from stronger domestic businesses. Additionally, since the debt is typically senior secured and set to float with interest rate benchmarks, there is diminished rate risk.

While investors may be concerned about defaults on the loans, risk is relatively low.

“Yes, I think there is chance of fewer defaults,” Copell added.