BDCs currently average about 9.3% in dividend yield and over 80% in loan portfolios with floating rate loans, which may allow BDCs to benefit from a rising interest rate environment,” said VanEck. “As such, BDCs may serve as a complement to income allocations to help enhance yield without adding significant interest rate risk. In addition, BDCs have historically offered a competitive risk/return tradeoff when compared with high yield bonds, leveraged loans, and equities across the market capitalization spectrum.”
Floating rate notes, like the name suggests, have a floating interest rate. Specifically, the notes’ have a so-called reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate or U.S. Treasury bill rate. Due to their short reset periods, these floating rate funds have relatively low rate risk.
“Combined with the recent tax reform and passage of the SBCAA, we believe the current case for BDCs is compelling. High yield and equity income investors may want to consider a diversified allocation of BDCs to complement their traditional income portfolios,” according to VanEck.
For more information on the fixed-income markets, visit our bond ETFs category.