Torsten Asmus
VanEck BDC Income ETF (NYSEARCA:BIZD) is a diversified exchange-traded fund with a focus on high-yielding business development companies.
The exchange-traded fund is an attractive investment vehicle for passive income investors, as they can quickly gain exposure to the BDC sector while avoiding company-specific risks.
The ETF opens up a pathway for passive income investors to participate in the growth of the sector more broadly and also gain exposure to well-managed, long-serving business development companies like Ares Capital (ARCC). The VanEck BDC Income ETF presently pays a dividend yield of 10.7%.
Diversified, Low-Cost ETF Choice For Passive Income Investors
Exchange-traded funds are attractive investment vehicles for passive income investors that are concerned about navigating the risk landscape in the BDC market.
Diversified exchange-traded funds, like the VanEck BDC Income ETF, which seeks to track the performance of the MVIS US Business Development Companies Index, offer passive income investors the opportunity to invest in the growth of the sector while avoiding BDC-specific risks. The VanEck BDC Income ETF manages $1.2 billion and charges investors a management of 0.40%.
The key benefit of investing in a diversified, BDC-focused ETF such as BIZD is that passive income investors don't have to spend time and resources to research individual business development companies. In addition, they avoid the risk of investing in a potentially underperforming business development company.
Some BDCs, like Oaktree Specialty Lending (OCSL), have suffered declines in their credit quality in recent quarters, leading to concerns over dividend sustainability and poor stock performance.
The VanEck BDC Income ETF was established on 02/11/2013 and has thus more than one decade return history under its belt. BIZD produced an 8.0% annual return performance since its inception in 2013, though the exchange-traded fund has had a much stronger one-year performance record of 24.6%, thanks to buoyant market conditions and stock market indices reaching all-time records.
Average Annual Total Returns (VanEck BDC Income ETF)
The VanEck BDC Income ETF is positively correlated with the S&P 500, as one would expect, from a fund that takes long positions on stocks. The beta ratio is only 0.71x, however, meaning for every 1% move in the stock market (as measured by the S&P 500), BIZD makes a direction 0.71% price move.
3 Year Risk Measures (VanEck BDC Income ETF)
I specifically chose the VanEck BDC Income ETF for my passive income portfolio because it overweighs one of my favorite business development companies, which gives the exchange-traded fund a quality tilt, in my view: Ares Capital Corp., which is the largest and best-managed business development companies in the market, with consistent NII performance, a low non-accrual ratio and a stable (though not growing) dividend.
Ares Capital has a 21% weighting within the VanEck BDC Income ETF's portfolio, which makes it by far the biggest position. The second-biggest position in BIZD is Blue Owl Capital (OBDC), but it had less than half the weighting of Ares Capital Corp as of July 15, 2024.
Since BIZD seeks to replicate the MVIS®US Business Development Companies Index, the largest BDCs in the sector are obviously included here: Next to Ares Capital and Blue Owl Capital, FS KKR Capital (FSK), Blackstone Secured Lending Fund (BXSL) and Hercules Capital (HTGC) are included in the top five.
Ares Capital, Blackstone Secured Lending and Hercules Capital particularly are three of my highest conviction BDC investments for long-term passive income investors. In terms of credit quality, I have a high opinion of Blackstone Secured Lending which also has the most attractive dividend growth potential in the long-run, given its excellent portfolio quality.
Daily Holdings (VanEck BDC Income ETF)
VanEck BDC Income ETF paid $1.82 per share in the last year as dividends, which breaks down to $0.45 per share a quarter. On a last twelve months basis, BIZD therefore paid a dividend yield of 10.7%.
Net Asset Value
VanEck BDC Income ETF had a net asset value of $16.94 as of July 15, 2024, which equates to the exchange-traded fund's price. In the long-run, I think business development companies could be valued at 1.0x net asset value, which represents the sum total of their underlying investment values.
As such, BIZD is primarily a diversification and yield investment, as far as I am concerned, though passive income investors could see long-term capital appreciation if the sector continues to grow.
Why An Investment In BIZD Is Still Risky
Sector-specific exchange-traded funds are tools that can help passive income investors manage risk effectively and avoid losses that come from picking individual stocks for purposes of seeking alpha.
With that being said, though, BDCs may rotate out of favor with passive income investors moving forward, meaning there is no guarantee that even diversified BDC-oriented ETFs will earn strong returns for passive income investors moving forward.
A main risk for BIZD is the exposure to floating-rate loans of its portfolio constituents. Many business development companies own concentrated portfolios made up of floating-rate loans whose rates will reset lower once the central bank cuts short-term interest rates. This inherently creates net investment income, dividend coverage and net asset value risks for investors that go with BIZD and could be a cause of temporary underperformance.
My Conclusion
The VanEck BDC Income ETF and the 11% yield that the exchange-traded fund pays on a quarterly basis could be a good choice for passive income investors with a desire to get immediate exposure to the high-yielding business development company sector without the risk that comes with individual stock-picking.
I like that the VanEck BDC Income ETF has a 'quality slant' and invests large percentages of its assets into high-quality BDC choices, particularly Ares Capital, Blackstone Secured Lending Fund and Hercules Capital, all of which I singled out as high quality BDC investment vehicles in my past coverage.
