The perception that non-traded BDCs are less volatile is appealing to some financial advisors. "When I talk to advisors about the pros and cons of non-traded vehicles, liquidity used to be a con, but in the past year it's almost gone to the pro side," says Susan Kelly, manager of alternative financial strategies at Commonwealth Financial Network, an independent broker-dealer whose platform includes Franklin Square's non-traded BDCs.
Ryan Wibberley, founder of CIC Wealth Management Group in Gaithersburg, Md., notes that non-traded BDCs aren't for every client. "I don't recommend this to clients who'll need that money within six to eight years," he says, adding that he puts no more than 5% of a client's portfolio into these securities. He says the non-traded BDC he's invested in has produced roughly 12% annual returns from current income, special distributions and capital appreciation. "People in retirement love them," he says.
Wibberley says he has used both traded and non-traded BDCs for clients, and considers the former to be more like equities, while the latter straddles the line between alternative investments and fixed income.
It's The Economy, Stupid
Investors can also invest in BDCs through two exchange-traded notes: the UBS ETRACS Wells Fargo Business Development Company (BDCS) and the UBS ETRACS 2X Wells Fargo Business Development Company (BDCL) funds. Both ETNs aim to track the Wells Fargo Business Development Company index, and both carry a 0.85% expense ratio.
In addition, Van Eck last May filed paperwork with the Securities and Exchange Commission to launch an ETF that would replicate the Market Vectors Business Development Company/Specialty Finance Index, a benchmark that is comprised of U.S.-listed BDCs and specialty finance companies. A company spokesman says no launch date has been set.
Investors who want to play in this space need to examine the pros and cons of traded versus non-traded BDCs, and to keep in mind the big economic picture. "BDCs are mainly a macro play," says Thomas Mason, senior analyst at SNL Financial. "If you believe an economic recovery is in the wings, BDCs are probably a good play."