Huge amounts of investment could soon flood into a tiny sector of the stock market.
How do I know?
Because Van Eck Global -- one of the largest fund companies in the world -- just launched a new investment product. It's called the Market Vectors BDC Income (BIZD). As the name suggests, this ETF will track a group of business development companies, or BDCs.
Now, you may not know Van Eck, but the company has been an innovator since 1955 when Jon Van Eck started an international mutual fund. His focus was investing in Europe and Japan in the wake of World War II. Those mutual funds allowed Americans to profit from the economic redevelopment in these international markets. While it sounds quite common today, investing in European or Japanese stocks in the 1950s was exotic.
Whenever Van Eck launches a new ETF, it pays to take notice. In 2006 -- just one year after the launch of the exceedingly popular SPDR Gold Shares ETF (GLD) -- Van Eck launched its own gold ETF. Its Market Vectors Gold Miners (GDX) provided exposure to the biggest mining stocks through a single ETF. And in the last seven years, GDX has been the top gold stock ETF. The fact that Van Eck is getting into the BDC space with a new ETF highlights the growing popularity of this income investment.
The Market Vectors BDC fund owns shares of 25 BDCs. The fund is highly concentrated, with the top five investments comprising 38% of assets. Today, this fund is tiny, with just $14 million in assets. BDCs themselves are a small opportunity in the world of income investing. In many ways, BDCs are similar to REITs and MLPs. They "pass through" roughly 90% of profits to shareholders in dividend payments, and are therefore able to legally avoid corporate taxes.
Compared with REITs and MLPs, there are far fewer BDC investments. And many of those available investments are small in size. Perhaps this is why Van Eck and just one other investment firm have launched ETFs focused on BDCs. In 2011, banking giant Wells Fargo partnered up with investment bank UBS to launch the UBS E-Tracs Wells Fargo BDC (BDCS). BDCs are slowly gaining popularity as income staved investors seek higher yields.
I've been recommending BDCs to my High Yield Wealth subscribers since early 2011. These investments have risen in value and still offer dividends of 8%-11%. The ETFs from Van Eck and UBS highlight the opportunity to invest in these little-known income investments. However, both funds are diversified among a wide variety of BDCs. Diversification can be a plus. But you must also remember that each of these BDCs also has a diverse portfolio of loans. That means buying an ETF of BDCs provides you with double the diversification.
Just as with stocks, investors will be best off hand picking the winners and avoiding the losers. Talented executives lead the best BDCs, and have demonstrated an ability to manage risks and deliver profits to shareholders in good times and bad. In short, I believe we're at the cusp of even bigger gains in this tiny segment of the stock market. That will be good for investors who already own these companies.
I think we still have an opportunity to build or add to positions in these types of opportunities, and I'm still telling my readers to buy.