Shortly after we provided a first look (back on April 20th, 2011) at the new Wells Fargo BDC Index comes two items of actionable news. First, we hear that UBS launches an ETN (the less loved cousin of an ETF) based on the aforementioned Wells Fargo Index. The ticker of the new BDC ETN is BDCS, and traded an encouraging 9,080 shares on its second day of trading.
There are two excellent articles about the new ETN from commentators on Seeking Alpha, which we refer anyone interested in the subtleties of the ETN structure. Michael Johnston discusses some of the tax “nuances” of ETNs and compares the new instrument against the granddaddy of the public face of private equity, the Powershares Global Listed Private Equity Portfolio (traded on the NYSE and whose ticker is PSP).
As the article points out, PSP does include many (but not all BDCs), but also has a large number of domestic and foreign publicly listed equity sponsor groups. PSP’s yield is substantially below that of BDCS, but net assets are a respectable $430mn, and the ETF trades in decent volume (over 300,000 shares a day). Ron Rowland also wrote an edifying article on this same subject which gave some background on UBS’ track record in the ETN space, and further color about the composition of the ETN and its initial yield (about 6.84% net). Distributions are payable quarterly.
FIRST AN ETN, NOW AN ETF
The second news item, which came to our attention only this weekend but was on the wires since April 28, 2011 was that asset management powerhouse Van Eck is about to launch an ETF invested in BDCs and “specialty finance companies”. The proposed ETF will be based upon
The Market Vectors Business Development Company/Specialty Finance Index. The Index is a rules-based index. Van Eck is the 6th largest ETF issuer, with 30 ETFs in its stable and $22bn under management.
The Index is intended to track the overall performance of a global universe of U.S.-listed BDCs and specialty finance companies that are organized under the laws of the United States selected by the Index Provider.
Van Eck is giving itself some wiggle room on securities selection by promising that the ETF will invest at least 80% in stocks in its index, and that correlation “between the Fund’s performance and that of the Index before fees and expenses will be 95% or better. A figure of 100% would indicate perfect correlation.” We leave it to ETF experts to explain that to us.
No word yet, though, on a ticker symbol and which BDCs and finance companies are to be included and who is not. The Wells Fargo Index eliminates some smaller BDCs due to their illiquidity and market cap. What Van Eck will do, and what will be included in the “specialty finance” category will be interesting.
Michael Johnston has already written an article about the Van Eck ETF, but there are still many unanswered questions. An ETF cannot, under the Investment Company Act of 1940, own more than 3% of any company, which could affect the ETF’s ability to replicate the performance of the Index. We read the Prospectus but did not glean much, and will wait for further insights from our colleagues in the ETF/ETN space.
BDC INDUSTRY ON THRESHOLD
These two new developments make the point that we have been putting around since inception: that the BDC industry is growing and deserves to be better known. We are always surprised about how many investment management professionals are not familiar with the industry, its quirky rules and tax consequences and the business of lending and investing in the huge pool of private companies that exists in America. Yet, BDCs are often sponsored by blue chip organizations, virtually all are followed by multiple analysts and dividend yields are well above the average of other dividend paying sectors such as REITs and MLPs.
Moreover, the regulation that requires BDCs to maintain a debt to equity ratio of no more than 1.0: 1.0 limits downside risk, as well as the requirement that all earnings be paid out to shareholders.