Vanguard, the third-largest U.S. ETF issuer, made waves on
Tuesday by announcing index changes for 22 of its funds. News
that the Vanguard MSCI Emerging Markets ETF (NYSE:
) will drop the MSCI Emerging Markets Index in favor of the
equivalent index sponsored by
FTSE Group garnered the most attention
The change, which will see VWO eliminate its
exposure to South Korean equities
, is the largest international index switch on record, according
to FTSE Group. Fortunately for investors in South Korean equities
and ETFs such as the iShares MSCI South Korea Index Fund (NYSE:
impact is expected to be minimal and not create
significant downside pressure
Other stocks may not be so fortunate. Business development
companies, or BDCs, could be adversely affected by Vanguard's
decision to change indexes on three of its small-cap ETFs. Those
funds - the Vanguard Small-Cap ETF (NYSE:
), the Vanguard Small-Cap Growth Index Fund (NYSE:
) and the Vanguard Small-Cap Value ETF (NYSE:
) - will drop MSCI indexes in favor of indexes constructed by
Chicago's Center for Research in Security Prices (CRSP).
The CRSP indexes do not make room for BDCs, a group of
equities prized for high yields and robust payouts. While
Vanguard has promised its departure from stocks not featured in
the CRSP indexes will be gradual and orderly, there is no getting
around the fact that some BDCs could see some selling
"BDCs in Vanguard's small-cap funds could be affected because
Vanguard is the largest holder of these stocks in some cases,"
Morningstar Research Director Paul Justice said in an interview
with Benzinga from the Morningstar ETF Conference in Chicago.
Justice's view was reiterated Morninstar ETF Analyst Michael
Rawson in a presentation to media members today.
TICC Capital (NASDAQ:
), a BDC with a yield north of 11 percent, is held by VB, VBR and
the mutual fund equivalents. Vanguard owned almost 1.73 million
shares of TICC at the end of the second quarter, according to
Yahoo Finance data.
VB and VBR also hold Prospect Capital (NASDAQ:
), which yields 10.6 percent. Overall, Vanguard ETFs and mutual
funds owned over 6.3 million shares of Prospect Capital as of the
end of the second quarter.
Those are just two examples and the stocks do not appear to be
reacting to news of the Vanguard index changes -- at least not
Investors may want to monitor the UBS ETRACS Wells Fargo
Business Development Company ETN (NYSE:
). BDCS has average daily volume of just 12,000 shares, but an
annual index yield of almost 10 percent
. However, the ultra-high yield is arguably overshadowed by
ultra-high fees of 0.85 percent that are accrued on a daily
basis, according to the fund's web site.
BDCS has a leveraged cousin in the form of the UBS ETRACS
2xLeveraged Long Wells Fargo Business Development Company ETN
), which has a current annual leveraged yield of
almost 19 percent
. Like BDCS, BDCL charges 0.85 percent, also accrued on a daily
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