While recently perusing exchange-traded funds on various research sites, I zeroed in on the most expensive funds. The winner (if one could call it that) was the VanEck Vectors BDC Income ETF (BIZD), with a whopping listed expense ratio of 9.41 percent.
That seems totally anachronistic in the world of ETFs, an investment vehicle touted as a lower-cost alternative to mutual funds. Furthermore, recent price wars have resulted in funds with bargain-bin expense ratios of three basis points.
Who the heck would invest in an uber-expensive ETF costing 941 basis points? Evidently, a lot of people—BIZD has assets under management of $190.2 million.
BIZD follows the MVIS US Business Development Companies Index which tracks the performance of publicly traded business development companies, or BDCs. BDCs invest in—or lend to—private small to midsize companies through various equity investments and debt securities—predominantly the latter, which can range from senior secured loans to non-investment-grade vehicles.
BDCs also provide managerial assistance to these middle-market companies, and they hope to profit as these businesses grow. They resemble private-equity firms even though they’re publicly traded.
People invest in BDCs mainly as income plays because they generally pay chunky dividends. In that vein, the BIZD fund sports a 30-day SEC yield of 9.67 percent.
At first blush, that yield appears to be almost swallowed whole by the listed net expense ratio of 9.41 percent. But the “Expenses Explained” link in the fund description section of the BIZD page on VanEck’s website explains the product’s fee structure and makes it clear that’s not actually the case.
BIZD is a fund of funds, and as such it must report a total expense ratio that accounts both for management fees and other expenses associated with VanEck, as well as the acquired fund fees of the underlying funds. Total acquired fund fees and expenses, known as indirect expenses, are 9.00 percent. Direct expenses for the ETF itself are 0.49 percent—VanEck’s management fee of 0.40 percent, plus 0.09 percent listed as “other expenses.” Fee waivers and expense reimbursement trim that amount by eight basis points.
Ultimately, the fee that BIZD investors pay is 0.41 percent.
BIZD is the only BDC-focued ETF, and is the largest exchange-traded product that invests in BDCs. There are four exchange-traded notes issued by UBS Global Asset Management that target this space.