Introduction
Investing in the right stocks can be a lucrative way to grow your wealth. However, with so many options available, it can be difficult to determine which stocks are worth investing in. In recent years, Business Development Company (BDC) ETFs have gained popularity among investors. In this article, we will explore what BDCs are, how they operate, and the benefits of investing in a BDC ETF.
What are Business Development Companies (BDCs)?
Business Development Companies, or BDCs, are a type of regulated investment company that invests in and lends money to small and mid-sized businesses. BDCs were created by Congress in 1980 to provide capital to small and medium-sized companies that may not have access to traditional financing. BDCs are required to pass through at least 90% of their investment income to shareholders, which makes them attractive for income-seeking investors.
How do BDCs operate?
BDCs operate by investing in private companies by providing capital through loans, equity, and debt instruments. BDCs typically focus on companies that have annual revenues between $5 million and $100 million. By investing in these companies, BDCs help them grow and expand by providing much-needed capital.
Why invest in a BDC ETF?
Investing in a single BDC can be risky, as the success of the investment is tied to the performance of that one company. A BDC ETF, on the other hand, reduces this risk by investing in a diversified portfolio of BDCs. This diversification spreads the risk across multiple companies, making it less likely that one company’s underperformance will significantly impact the overall performance of the ETF.
Another advantage of investing in a BDC ETF is the potential for high income yields. Due to the requirement that BDCs pass through at least 90% of their investment income to shareholders, BDC ETFs can offer higher dividend yields than other types of ETFs.
Examples of BDC ETFs
There are several BDC ETFs available on the market. One popular option is the VanEck Vectors BDC Income ETF (BIZD). This ETF invests in a diversified portfolio of publicly-traded BDCs and offers a current dividend yield of around 8%.
Another option is the ETRACS Wells Fargo Business Development Company Index ETN (BDCS). This ETN tracks the performance of the Wells Fargo® Business Development Company Index, which includes publicly-traded BDCs selected for their liquidity and exposure to the asset class.
Conclusion
BDCs provide investors with an opportunity to invest in and lend money to small and mid-sized businesses that may not have access to traditional financing. By investing in a BDC ETF, investors can diversify their portfolios and potentially earn high dividend yields. However, it’s important to do your research and choose a BDC ETF that aligns with your investment goals and risk tolerance.
