Van Eck, the New York-based money management firm behind the Market Vectors ETFs, today is launching an equity income ETF focused on business development companies, or BDCs—a strategy that until now had only been available to investors in an ETN wrapper.
The Market Vectors BDC Income ETF (NYSEArca: BIZD) will track a proprietary index comprising companies that provide financing to small, often private, businesses. The portfolio includes 25 names with a weighted average market capitalization of $2 billion.
BIZD comes with an annual management fee of 0.40 percent, which is contractually capped for one year. However, the prospectus shows that once acquired fund fees are taken into account, the fund's total expenses are 7.56 percent, though those costs won't be absorbed by fund holders, a Van Eck official said. Instead of being paid out of fund assets, those fees are reflected in the prices of the underlying securities.
BDCs are considered closed-end funds, which forces Market Vectors to report acquired fund fees that represent the embedded stock price of those companies. But investors will never see those fees “directly,” Van Eck’s Ed Lopez told IndexUniverse.
Business development companies were created as public vehicles that invest in private equity and were intended to increase cash flow to small businesses. A BDC lends to small and midsize companies at high-yield equivalent rates and often takes equity stakes in these companies.
The idea behind investing in BDCs is that by owning BDCs, investors can take part in financing the development of various businesses, Lopez said. They are particularly attractive for the income they generate—BDCs are currently returning yields of about 7.5 percent, Lopez said.
The ETF will join a pair of UBS BDC ETNs that came to market in 2011, the $22 million ‘BDCS’ and its leveraged counterpart, ‘BDCL,’ strategies that are linked to the Wells Fargo Business Development Company Index, but that, as ETNs, are subject to the credit risk of its issuing bank, UBS. The ETNs each cost 0.85 percent.
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