Market Vectors, the fifth-largest US issuer of exchange-traded products sponsored by Van Eck Global, has launched the Mar Vectors BDC Income ETF (BIZD), the first exchanged-traded fund designed to offer pure-play exposure to business development companies (BDCs).
Business development companies generate income by lending to, and investing in, privately-held or thinly traded public companies that tend to be below investment-grade or not rated. BIZD seeks to replicate, before fees and expenses, the Market Vectors US Business Development Companies Index (MVBIZDTG), a rules-based index intended to track the overall performance of publicly traded business development companies.
To qualify for the index, a BDC must have a market capitalization in excess of $150 million, a three-month average daily trading volume of more than $1million if listed, and a minimum trading volume of 250,000 shares each month in the previous six months.
BDCs are known for high dividend payouts and offer investors a chance to gain exposure in senior secured debt, mezzanine debt, private equity and other exotic layers of capital structure traditionally available to institutional investors.
The index currently has 25 constituents with Ares Capital (15.98 percent), American Capital Ltd (14.81 percent), Prospect Capital Corp (7.48 percent), Apollo Investment Corp (6.11 percent) and Triangle Capital Corp (4.85percent) receiving the highest allocation. The top ten holdings account for 72.10 percent of total asset allocation.
Since little information is available (analysts of leading financial institutions tend to ignore them, hence they mostly remain under the radar) for private and thinly traded companies, there is a possibility that you may not be able to make fully informed investment decisions, thus missing out on opportunities.
However, you should bear in mind that investing in smaller and less-mature private companies involves greater risk than well-established and larger publicly-traded companies, making them potentially more susceptible to issues arising of defaults and bankruptcies. Additionally, limitations on asset mix and leverage may make it difficult for BDCs to raise capital. BDCs also tend to be adversely affected by market volatility than more diversified investments.
BIZD has a direct expense ratio of 0.40 percent. However, SEC rules requires fund of funds like BIZD to report a total expense ratios that constitutes expenses that a fund pays out directly out of its assets (“direct expenses”) as well as the expense ratios of the underlying funds in which it invests (acquired fund fees or indirect expenses).
BIZD has acquired fund fees and expenses of 7.16 percent with the net expense ratio totaling to 7.56 percent (7.10 percent plus 0.40 percent). You should note that acquired fund fees and expenses (7.16 percent in this case) are reflected in the prices of the acquired BDC shares and thus included in the total returns of the fund.
I wanted you to know that these types of ETFs exist. Personally, I do not favor this set up due to lack of transparency and high risk. However, if risk is your middle name, then you should research BIZD further.
Disclosure: No holdings
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