Against the backdrop of falling Treasury yields, plenty of income-generating asset classes and sectors have are delivering for investors this year. That includes business development companies and the VanEck Vectors BDC Income ETF (NYSEArca: BIZD). However, BDCs and BIZD might not be left out in the cold if interest rates rise.
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).
BDCs 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.
Investors have embraced BDCs for their attractive yields as they are required to pay out at least 90% of interest income received in cash dividends. 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.