BDCs Have Big Yields, But Consider These Important Factors

The search for yield can take income investors to a wide range of alternative asset classes. Those include business development companies (BDCs), accessible via the VanEck Vectors BDC Income ETF (NYSEArca: BIZD).

BIZD looks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® US Business Development Companies Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index.

The index is comprised of BDCs. BDCs are vehicles whose principal business is to invest in, lend capital to, or provide services to privately-held companies or thinly traded U.S. public companies. Getting financing nowadays can be tough through traditional means like big banks. BDCs help fill the gap. While the income proposition is alluring, investors have other considerations with BDCs.

“A challenge investors may face when considering investing in BDCs is that each BDC management team tends to have their own philosophy and will position their portfolios accordingly. Credit risk at the company and industry level may vary,” notes Brandon Rakszawski, VanEck senior ETF product manager. “Recent legislation has increased the leverage cap for BDCs from 1:1 to 2:1, so BDCs have more flexibility when managing their leverage targets, which depends on how the BDC approaches capital structure exposure.”

BIZD 1 Year Performance

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BDCs provide struggling companies with loans they aren’t able to get via traditional means. As the global economy continues to heal amid a vaccine rollout, companies will need to get funding to continue the healing process and inject capital back into their businesses.

“During the COVID-driven market sell-off in the spring of 2020, BDCs were also hit hard, given that they have more exposure to equity market risk than other income asset classes. However, the leverage cap increase gave BDCs more flexibility to manage through volatile periods, and BDCs have recovered significantly as the U.S. economy reopened and positive vaccine news was announced,” adds Rakszawski.

BIZD components 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.

“We believe BDCs are well-positioned as the economic recovery continues to take shape. Yield has historically been consistent, and its floating rate exposure may become more of an attractive story line with the potential for further rising interest rates,” concludes Rakszawski.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.