UBS, the Swiss bank famous for private-client wealth management,
launched an exchange-traded note today focused on business
development companies, following by a day the filing of papers by
exchange-traded fund company Van Eck to gain the permission to
offer a similar product in an ETF package.
The UBS AG Exchange Traded Access Securities (E-Tracs) Linked to
the Wells Fargo Business Company Index (NYSEArca:BDCS) will have an
annual expense ratio of 0.85 percent, according to information
posted on the New York Stock Exchange's "IPO Showcase" web
Business development companies, or BDCs, were created as public
vehicles that invest in private equity and were intended to
increase cash flow to small businesses, according to Wells Fargo,
the index provider for the new ETN. A BDC lends to small and
mid-sized companies at high yield equivalent rates and often takes
equity stakes in these companies, UBS said in a press release.
The UBS product, because it is an ETN, appears to be the only
exchange-traded vehicle that could actually deliver a pure-play
portfolio of BDCs. Indeed, the Van Eck prospectus outlining its
planned Market Vectors Business Development Company/Specialty
Finance ETF said restrictions under the Investment Company Act of
1940 cap the amount that an ETF can own of an individual BDC to 3
percent of that BDC's outstanding stock - a fact that could at
times limit the fund's ability to replicate its index.
Also, the PowerShares Global Listed Private Equity Portfolio
(NYSEArca:PSP) is an existing ETF that can own BDCs as well, and
that fund's prospectus indicated PSP is subject to the same
ownership restrictions of BDCs under the 1940 Act that Van Eck's
fund will be. The PowerShares ETF launched in October 2006.
Another advantage of an ETN is that any tax consequences of
changes in the underlying index are deferred until investors sell
A Healing Economy?
The focus in the exchange-traded product industry on financing
for smaller companies comes at a time when some analysts are saying
the real economy is starting to become more engaged apart from the
monetary stimulus from the Federal Reserve in the form. The credit
markets began to seize up nearly three years ago, and completely
froze after the market meltdown in September 2008.
Since then, credit has remained tight. For the moment, however,
many still say it's easier for large companies to get financing
than it is for smaller ones.
But UBS's launch of BDCS and Van Eck's putting a similarly
focused ETF into registration suggests the credit markets may
finally be returning to some semblance of normality.
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