Big Income with BDCs (BDCS, BIZD, ARCC, ACAS)
Finding investments that provide consistent above-average income in the current environment is not an easy task.
The yield on the 10-year Treasury is 2.70 percent and the interest rate on savings accounts is basically non-existent.
Investors that choose to invest in ETFs that track the price of U.S. bonds will create a monthly income stream that is better than no interest. However, as interest rates increase, which they have, it will have the inverse affect on the value of bond ETFs. Thus, the end result is the price of bond funds falling and the high probability of losses by owning bond ETFs.
By thinking outside the box and looking at alternative sources for income, investors will have a few options to choose from. Business development companies (BDCs) are a niche sector of the market that loan small and mid-sized companies money in exchange for a high interest payment or a stake in the company. They will pay back a large portion of their revenue to investors by the way of a dividend.
Market Vectors BDC Income ETF (NYSE: BIZD)
The ETF is a basket of 27 BDCs based in the U.S. that invest in a variety of different companies. The top two holdings account for 26.5 percent of the ETF and will weigh heavily on the performance of the ETF. Ares Capital (NASDAQ: ARCC)and American Capital (NASDAQ: ACAS) are the top holdings.
BIZD is a fairly new ETF, launching in February of this year. Since that time the ETF is up slightly after a series of peaks and troughs. This week the ETF was able to break above the previous high and closed at the best level since it began trading. Add the bullish chart pattern to the current dividend yield of 7.4 percent and the ETF is catching the eyes of investors.
The management fee is 0.40 percent and the net expense ratio (includes indirect expenses that are only related to BDCs) is 8.33 percent.
ETRACS Wells Fargo BDC ETN (NYSE: BDCS)
The ETN tracks a similar index as BIZD, however they go about it in a different manner. BDCS is an ETN and therefore it does not own the BDCs that make up the underlying index, instead it will use instruments to track the index. The top two holdings are the same and they make up 20.3 percent for BDCS.
The chart on BDCS is also trading near a multi-month high and not far from breaking out to a multi-year high. The ETN is currently yielding 7.0 percent and charge an annual tracking fee of 0.85 percent.
A real plus for the BDCs is that they are able to move higher with the market as they are tied to equities as well as offer a high dividend yield. The risk is that as interest rates begin to increase it could cause the stock market to fall along with the high yielding securities, a double whammy for the BDCs.
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