Exchange-traded funds are supposed to help investors reach corners of the financial markets cheaply through a variety of indexes.
Then there’s VanEck Vectors BDC Income ETF, symbol BIZD.
The fund, which tracks publicly traded business development companies, known as BDCs, is by far the world’s most expensive ETF, with an eye-popping expense ratio of 920 basis points. To understand how high this is, consider that the next closest fund charges 362 basis points, according to data compiled by Bloomberg.
Yet despite the astronomical costs, investors are pouring record sums of cash into the ETF. What gives?
For starters, investors are increasingly attracted to BDCs as a higher yielding alternative to junk-rated debt, and the ETF gives them access to that. BDCs are set up like closed-end investment funds that, like private equity firms, help small and medium-sized companies grow in their initial stages. They’re now taking on a greater share of commercial loans to these businesses, filling a void created by banks that are pulling back from this segment. BIZD buys shares of firms that invest in the debt and equity of these businesses.
“We look at these BDCs as shadow financiers for the middle market,” said Keith Wander, portfolio manager for Roble, Belko & Co. Inc. “We look at this as a surrogate to high-yield, and with this fund you’re getting anywhere from 300 to 400 basis points in yield over high-yield mutual funds.”
Complex Structure
And then there’s the complexity of BIZD’s architecture, with multiple layers that add to its massive expense ratio.
The ETF essentially is structured as a fund of funds in its BDC holdings. As such, the Securities and Exchange Commission requires its expense ratio to include any of the acquired fees from the underlying investment companies it holds, according to Meredith Larson, product manager at VanEck. These fees and expenses are “embedded in the return of the ETF,” but if the added costs are factored out VanEck calculates that investors are actually being charged about 41 basis points for the fund’s management, she said.
Assets for BIZD have taken off this year, increasing by more than 40 percent to $195 million through June 21, according to Bloomberg data. Buyers poured $21 million into the ETF in May, the largest month of inflows since its inception in February 2013, the data show.