In investors' never-ending quest for high yield securities,
many have taken a closer look at BDCs for exposure. These
Business Development Companies
have often been overlooked by many, but are seeing more interest
thanks to their big income payouts, and the potential for capital
Their availability in the ETF world was extremely limited
though, as only a single ETN was available
in the unleveraged space, although another was in the 2x market
. Still, the unleveraged product pays out roughly 9.8% in annual
yields making it a very intriguing option for yield-centric
These ETNs do look to have a new competitor in the space
though, as Market Vectors has just released the very first BDC
product structured as an ETF. This new fund, the
BDC Income ETF (
looks to track the Market Vectors US Business Development
Companies Index and could present an interesting option for those
curious about the BDC space (read
Three Excellent Dividend ETFs for Safety and
BDC Income ETF in Focus
The ETF looks to invest in a variety of BDCs which are traded
in the American market. These BDCs generate income by lending to,
and investing in, private companies that are generally below
investment grade or are not rated, allowing for a high rate of
In total, BIZD invests in 26 firms with a relatively high
level of concentration in the top names.
Ares Capital (
American Capital (
both account for over 15% of total assets, while the next three
firms combine to account for roughly 18% as well.
Investors should also note that the portfolio is relatively
skewed towards pint sized securities, as large caps make up 0% of
the fund, while mid caps account for 54% of assets. Dividends are
expected to be paid on a quarterly basis and could come in at
7.6%, based on the observed annual index yield we say for the end
Expense Ratio Conundrum
Investors should also note that this is one of the more unique
products out there from an expense ratio perspective. The direct
expenses come in at 40 basis points a year, and are capped to
stay there until September of 2014.
However, 'acquired fund fees and expenses' come in at a
whopping 7.16%, greatly increasing the gross expense ratio, and
resulting in a 'net expense ratio' of 7.56% (see
3 Multi-Asset ETFs for Juicy Yields and
This probably isn't telling the full story though as according
to Van Eck, these acquired fund fees and expenses are not borne
directly by the fund. Instead they reflect the Fund's pro rata
share of indirect fees and expenses incurred by investing in
The reason for the disclosure like this stems from an SEC rule
that was adopted on funds-of-funds back in 2006. This rule
requires firms to report a total expense ratio in prospectuses
that accounts for both expenses paid directly out of its assets,
as well as the expense ratio of the underlying funds in which it
Can You Beat These High Dividend ETFs?
According to a press release by Van Eck "the disclosure of the
fund's indirect expenses in the fund's fee table is contained in
the acquired fund fees and expenses line item. This disclosure is
designed to provide investors with a better understanding of the
actual cost of investing in a fund that invests in other funds,
which have their own expenses that may be as high, or higher,
than the acquiring fund's expenses."
The press release continued "Accordingly, the prospectus for
BIZD discloses its AFFE which is expected to be 7.16%. However,
because these fees are not borne directly by the Fund, they will
not be reflected in the expense information in BIZD's financial
statements and the information presented in the prospectus table
will differ from that presented in BIZD's financial highlights
included in BIZD's reports to shareholders, when available."
While this is somewhat of a mouthful, investors should
basically note that because BDCs are investment companies, BIZD
is more-or-less a fund of funds in the SEC's eyes. This means
that Van Eck is required to report operating expenses of the BDCs
as 'acquired fund fees'.
This includes things like payroll and other general costs, and
these are obviously not borne by the fund. They are important for
a BDC's share price, however, so investors will have to 'pay' for
these costs in terms of stock prices as these costs will
necessary reduce a BDC's income that is available for loans and
thus, eventually, profits (see
3 Excellent ETFs with More than 4% Yield
How does it fit in a portfolio?
This ETF seems appropriate for those seeking a high income
play in the relatively uncorrelated BDC ETF market. These BDCs
often loan capital to firms that are very small or are otherwise
uninvestable in other ways, making them an interesting way to tap
into this overlooked market segment.
The fund could face some light trading volume initially
though, so bid ask spreads could be wide in the beginning.
However, the fund's management fee is relatively low which should
keep after-expense yields above a very impressive 7% mark, making
this an intriguing income destination (read
The Right and Wrong Ways to Invest in China
Can It Succeed?
The fund does look to be a great way to play the BDC space in
ETF form, while its yield will be tough to beat. The product
could also be an interesting choice for those who like the ETF
structure but were put off by the other two choices in the space
and their ETN build.
However, the expense ratio issue could be a major sticking
point for investors. While it isn't that big of a deal once
investors delve into the product, the initial sticker shock for
BIZD could be high and be somewhat prohibitive to asset
accumulation, at least to those who aren't willing to look closer
at the high income ETF.
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AMER CAP LTD (ACAS): Free Stock Analysis
ARES CAP CP (ARCC): Free Stock Analysis
E-TRC WF BDCI (BDCL): ETF Research Reports
E-TRC WF BDCI (BDCS): ETF Research Reports
(BIZD): ETF Research Reports
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