Business development companies (BDCs) are playing a vital role amid the COVID-19 pandemic by getting much-needed financing to small, medium-sized, or distressed companies in need of cash. ETF investors looking to get in on the BDC action can do so with the VanEck Vectors BDC Income ETF (BIZD).
BIZD gets down to business by seeking 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. As mentioned, getting financing nowadays can be tough through traditional means like big banks, but BDCs are able to help fill this role.
- High Income Potential: Business Development Companies (BDCs) have proven an attractive alternative income source historically
- Exposure to Private Credit: Target privately-held U.S. companies and thinly traded U.S. public companies which are generally difficult to access
- Lending to Middle-Market Companies: BDCs generate income by lending to, and investing in, private companies that tend to be below investment grade or not rated
Income Potential and a Surprising Diversifier
Fixed income investors are keenly aware of the challenges in today’s fixed income environment given the low yields. As they look to alternative sources, BDCs can provide an option for income.
“Because BDCs are regulated investment companies (RICs), they must distribute over 90% of their profits to shareholders,” an Investopedia article explained. “That RIC status, though, means they don’t pay corporate income tax on profits before they distribute them to shareholders. The result is above-average dividend yields. According to ‘BDCInvestor.com,’ as of May 2019, the ten highest-yielding BDCs were posting anywhere from 10.82% to 14.04%.”
Additionally, though, the risk might be higher for BDCs in today’s COVID-19-ridden environment. However, they do offer diversification for a fixed income portfolio.
“Investors receiving dividends will pay taxes on them at their tax rate for ordinary income,” the article explained further. “Also, BDC investments may diversify an investor’s portfolio with securities that can display substantially different returns from stocks and bonds. Of course, the fact that they trade on public exchanges gives them a fair amount of liquidity and transparency.”
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