The spread of BDC yields relative to more traditional junk bonds has widened this year, nearing 400 basis points compared to the 300 basis-point average, Wander said. To chase that, he replaced the high-yield exposure he was getting through VHDYX, the Vanguard High Dividend Yield Index Fund, with BIZD.
That said, Wander still has some concerns given the potential deregulation of banks and how this could increase competition for BDCs in the space. But the price-to-book for the S&P 500 Banks Industry Group Index has had a nice run up over the past year compared to a flat ratio for BDCs, meaning BDCs are now relatively undervalued. This could help explain the surging demand for BIZD.
VanEck’s Larson doesn’t worry much about bank competition.
“When I speak to analysts their opinion is that as a result of Dodd-Frank a lot of banks had to dismantle a lot of these processes where they would have had these kind of loans,” she said. “They’re not likely to take the time to re-establish that, and BDCs have become well-oiled machines.”
The only other way to get BDC exposure through an exchange-traded product is the ETRACS Wells Fargo Business Development Company Index ETN, ticker BDCS. But exchange-traded notes have counter-party credit risk, which is a turnoff for investors, Larson said.
In fact, David Cowles, director of investment for the San Francisco-based asset manager Mosaic Financial Partners Inc., said he moved out of the ETN and into the fund as soon as the BIZD launched.
“This is a nice way for us to get a little bit of exposure to the venture capital world without running into the hedge fund and private equity kind of investments,” Cowles said. “It has very high historical returns, but also very high volatility.”
This article was provided by Bloomberg News.