BDC ETF as a Rebound Play

  • Opportunity could be afoot with Business Development Companies (BDCs)
  • BDCs offer attractive income opportunities since they are required to pay out 90% of income in form of dividends
  • Smaller business have been forced to take loans from BDCs since financial crisis had regulators clamping down on traditional lenders

Business development companies (BDCs) were punished last year on fears of higher interest rates, leaving many trading below their net asset values while sending the Market Vectors BDC Income ETF (NYSEArca: BIZD) to a 12-month loss of 9.1%.

However, BIZD has climbed by roughly the same amount in just the past two weeks, indicating opportunity could be afoot with BDCs, a once beloved income-generating asset class. Rallying oil prices are also helping BDCs, which were previously seen as vulnerable to faltering crude prices, a case that some say was overstated.

Some analysts see BDCs being able to survive lower oil prices. BDCs offer attractive income opportunities since they are required to pay out 90% of income in form of dividends, a structure similar to what income investors find with real estate investment trusts (REITs).

The companies essentially help fund small $5 million to $100 million businesses. Ever since the financial crisis, regulators have clamped down on traditional lenders and made it harder for businesses to access public capital, which has forced smaller business to take loans from BDCs. [BDC ETFs for a Growing Economy, Attractive Yields]

“Business development companies (BDCs) have been hit hard in the past two years due to worries about rising rates and a slowing economy. Gregg Abella, portfolio manager at Investment Partners Asset Management, said the turn is at hand for the small business lending vehicles. ‘I like them for their forward yield, their discount to net asset value (NAV) and I’m a fan of them because they trade at a low multiple of their earnings,’ said Abella” in an interview with TheStreet.com.