Business Development Companies (BDCs) are appealing to investors seeking high dividend yields and added diversification. Here we'll take a closer look at BDCs and exchange-traded products (ETPs) for exposure:
What Are Business Development Companies?
BDCs typically provide long-term debt and or equity capital as well as managerial help to small, illiquid, or distressed businesses. The SEC highlights that these businesses "are typically in their early stages of development or are distressed companies that may not be able to obtain bank loans or raise money from other investors."
Many BDCs are run by major private-equity firms and resemble private-equity companies even though they are publicly traded. Their main aim is to generate current income and capital gains. Unlike banks that focus on a business's credit rating before providing a loan, BDCs examine the overall business together with prospects for growth. Thus BDCs can make investments in risky businesses that most conservative bank portfolios would not be able to tolerate.
Deloitte explains:
"[BDCs] play a crucial role in providing financing solutions for companies seeking loans typically between $10 million and $100 million... BDCs ... gained additional flexibility thanks to federal legislation passed in spring 2018. BDCs now can maintain a debt-to-equity ratio of 2:1, an increase from 1:1. While higher leverage may increase risk as well as rewards, it is still well below that generally afforded to banks."
However, not all Business Development Companies are created equal. Investing in exchange-traded products can offset the risks of any single BDC. Let's take a closer look at two such funds:
1. VanEck Vectors BDC Income ETF
- Current Price: $13.95
- 52-Week Range: $6.8-$17.3
- Year-to-date (YTD) Change: Down 16.72%
- Dividend Yield: 10.52%
- Expense Ratio: 0.40%
The VanEck Vectors BDC Income ETF (NYSE:BIZD) provides exposure to a range of US-based, publicly-traded business development companies, which lend money to firms that are below investment grade or not rated. The fund started trading in early 2013. Net assets under management are $259 million. 
BIZD, which has 26 holdings, tracks the MVIS US Business Development Companies Index. Over 61% of the funds are in the top ten stocks.
Ares Capital (NASDAQ:ARCC), Goldman Sachs BDC Closed End Fund (NYSE:GSBD)), Owl Rock Capital (NYSE:ORCC), FS KKR Capital Corp II (NYSE:FSKR) and Hercules Capital (NYSE:HTGC) lead the names in the fund.
So far in the year, the fund has declined over 16% in value. However, since the lows seen in early spring, it is up around 75%. Passive income-seeking investors are likely to find the current yield of over 10.5% appealing. Those market investors who are bullish on the sector after conducting a top-down analysis may consider buying the dips.
2. UBS ETRACS Linked to the Wells Fargo Business Development Company Index ETN Series B
- Current Price: $16.22
- 52-Week Range: $8.87-$22.63
- YTD change: Down 20.57%
- Dividend Yield: 10.02%
- Expense Ratio: 0.85%
The UBS ETRACS Linked to the Wells Fargo Business Development Company Index ETN Series B (NYSE:BDCZ) is an exchange-traded note (ETN),}} which we previously covered. It is one of the four ETPs issued by UBS (NYSE:UBS) in the BDC space. The ETN started trading in 2015, and its maturity date is April 2041.
BDCZ tracks the Wells Fargo Business Development Company Index, which was created in January 2011. Several of the BDCs included in the index are Ares Capital, FS KKR Capital II, Owl Rock Capital, FS KKR Capital I (NYSE:FSK) and Golub Capital BDC (NASDAQ:{{24375|GBDC).
The current dividend yield stands over 10%. However, it is important for investors to remember that total annual returns are by no means assured to exceed this yield. In fact, they may not even be positive.