BDCs should also do relatively well in the kind of environment where many expect an increase in interest rates. Since BDC loans are mostly floating rate, the companies could earn more as rates rise.
“Market access for BDCs is likely improving due to a mix of increased interest rates supporting net interest income, greater stabilization in the group’s energy exposures, right-sizing of some dividends, some adjustment in their external management fees and incentive income, and stronger deal flow heading into 2017,” said Fitch.
Although investors are often faced with the prospect of paying up on valuation for higher yielding asset classes, that is not necessarily the case with BIZD. The ETF sports a price-to-earnings ratio of just under 15, which implies a notable discount to the broader universe of U.S. stocks.
“BDC equity valuations have also benefited from these dynamics with the average share price discount to book value for Fitch-rated BDCs improving to 1.3% as of January 13, up from a discount low of approximately 25% in early 2016,” adds Fitch.