The search for added yield and income can take investors to some unique asset classes, including business development companies (BDCs). Often high-yielding, BDCs are accessible in the form of an exchange traded fund with the Market Vectors BDC Income ETF (NYSEArca: BIZD).
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.
BIZD, which is more than five years old and holds 26 BDCs, has recently been seeing increased investor interest. The ETF’s 30-day SEC yield of almost 9% could be one reason why.
“Assets for BIZD have taken off this year, increasing by more than 40 percent to $195 million through June 21, according to Bloomberg data. Buyers poured $21 million into the ETF in May, the largest month of inflows since its inception in February 2013, the data show,” reports Carolina Wilson for Bloomberg.
BDCs are also seen as sensitive to higher interest rates, but that situation may be overstated as well. Since the debt is typically senior secured and set to float with interest rate benchmarks, there is diminished rate risk. When the Fed raises rates, BDC loan interest rates pegged to the London Interbank Offered Rate, or LIBOR, will also rise.
BIZD’s recent surge in popularity comes in spite of the ETF’s big expense ratio. The ETF’s net expense ratio is 9.2%, according to issuer data, well above the ETF industry average.
“The fund, which tracks publicly traded business development companies, known as BDCs, is by far the world’s most expensive ETF, with an eye-popping expense ratio of 920 basis points. To understand how high this is, consider that the next closest fund charges 362 basis points, according to data compiled by Bloomberg,” reports Bloomberg.
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.
Competitors to BIZD include the UBS E-TRACS Wells Fargo Business Development Index ETN (NYSEArca: BDCS), but that product is structured as an exchange traded note (ETN). ETNs introduce counterparty risk, which can be a reason to favor ETFs where such risk is not an issue.