Investors perusing the universe of alternative investments have some interesting options to consider. Those looking for some extra income and yield to accompany their alternative investments may want to consider business development companies (BDCs) through exchange-traded funds (ETFs).
BDCs are a compelling alternative asset class for income investors because to be structured as a BDC, these companies are required to pay out 90% of their earnings in the form of dividends. The same structure is seen with other income-generating asset classes, such as real estate investment trusts (REITs).
Due to their high dividend status, BDCs are seen as vulnerable to rising interest rates, but there is some good news on that front. Most of the debt held by BDCs is floating rate debt, meaning it is less sensitive to rising Treasury yields.
Investors looking to access BDCs via ETFs have some options to consider, including the following BDC ETF products.
Business Development Company (BDC) ETFs: VanEck Vectors BDC Income ETF (BIZD)
Expense ratio: 9.67% per year, or $967 on a $10,000 investment
Yes, that net expense ratio for the VanEck Vectors BDC Income ETF (NYSEARCA:BIZD), as found on the fund’s website, is a whopper. However, there is more to the story. Due to an SEC rule established in 2006, fund of funds products, such as BIZD, are required to disclose the expenses the fund pays out of its assets as well as the fees on the underlying funds. The expenses borne by BIZD are actually lower than the stated expense ratio.
BIZD, which debuted over five years ago, tracks the MVIS US Business Development Companies Index. This BDC ETF holds 27 stocks with Ares Capital Corp. (NASDAQ:ARCC) commanding more than 20% of the fund’s weight.
BIZD is lower by nearly 9% over the past year, but this BDC fund has recently shown signs of life. It is up more than 3% this month and about 4.20% since the start of the current quarter. BIZD has a 30-day SEC yield of 8.96%, according to VanEck data.
Business Development Company (BDC) ETFs: Etracs Linked to the Wells Fargo Business Development Company Index ETN (BDCS)
Expense ratio: 0.85%, accrued daily
As its name implies, the Etracs Linked to the Wells Fargo Business Development Company Index ETN (NYSEARCA:BDCS) is structured as an exchange-traded note (ETN), not an ETF. ETNs are debt instruments issued by banks and can be vulnerable to deterioration in the issuing bank’s credit rating. UBS is the issuing bank behind BDCS.
BDCS follows the Wells Fargo Business Development Company Index, a cap-weighted collection of BDCs trading on major U.S. exchanges.
Ares Capital is also the largest holding BDCS, but only to the tune of 10.11%. Main Street Capital Corp. (NASDAQ:MAIN) and Corporate Capital Trust Inc. (NYSE:CCT) combine for 16% of the BDCS roster.
Like the aforementioned BIZD, BDCS has scuffled over the past year but has recently perked up, gaining 4.53% since the start of the second quarter. BDCS has an annualized yield of 8.40%.
Business Development Company (BDC) ETFs: Global X SuperDividend Alternative ETF (ALTY)
Annual fund operating expense: 2.84%.
The Global X SuperDividend Alternatives ETF (NASDAQ:ALTY) is not a dedicated BDC ETF. Rather the fund features exposure to an array of income-generating assets, including real estate, MLPs and infrastructure, institutional managers, and fixed income and derivative strategies, according to Global X.
While BDCs are not ALTY’s primary focus, companies classified as BDCs or private equity firms are the largest industry exposure in ALTY at almost 28%. The Global X ETF is comprised of other funds, including mutual funds, but ALTY’s largest individual holding is another Global X SuperDividend ETF.
ALTY has a 30-day SEC yield north of 8% and pays a monthly dividend.
Business Development Company (BDC) ETFs: PowerShares Global Listed Private Equity Portfolio (PSP)
Net Expense Ratio: 2.31%
Like the aforementioned ALTY, the PowerShares Global Listed Private Equity Portfolio (NYSEARCA:PSP) is not a dedicated BDC ETF, but by virtue of its private equity emphasis, PSP does expose investors to income-generating BDCs.
PSP, which debuted nearly 12 years ago, follows the Red Rocks Global Listed Private Equity Index, one of the most widely regarded gauges of listed private equity investments.
As highlighted by PSP’s three-year track record, combining other asset classes with BDCs has topped emphasizing business development companies alone. This BDC ETF has topped the rival BIZD by 800 basis points over the past three years.
None of PSP’s 59 holdings account for more than 6.33% of the fund’s weight. Just a quarter of the fund’s holdings are considered large-cap stocks. PSP has a 12-month distribution rate of 11.78%.
Business Development Company (BDC) ETFs: ProShares Global Listed Private Equity ETF (PEX)
Net expense ratio excluding acquired fund fees and expenses: 0.60%
Like PSP, the ProShares Global Listed Private Equity ETF (CBOE:PEX) focuses on globally listed private equity firms, but that strategy provides exposure to BDCs. In fact, several of PEX’s top 10 holdings are found in some of the dedicated BDC products highlighted here. That includes Ares Capital and Main Street Capital. PEX excludes companies that are classified as managers of private equity funds.
PEX has a roster of just 30 components, a focused roster relative to some of the funds in this category. The average market value of those holdings was $2.40 billion at the end of the first quarter, putting PEX barely into mid-cap territory. There is some element of currency risk to consider with PEX because the fund’s securities are denominated in six other currencies in addition to the dollar and the greenback accounts for barely more than 43% of PEX’s currency exposure.
PEX follows the LPX Direct Listed Private Equity Index, which employs liquidity screens that monitor relative trading volume, among other traits. The ProShares ETF had a 30-day SEC yield of 4.85% at the end of the first quarter.
Todd Shriber does not own any of the aforementioned securities.
