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VanEck BDC Income ETF (NYSEARCA:BIZD) is an exchange-traded fund (ETF) launched and managed by Van Eck Associates Corporation. The fund invests in public equity shares of mostly micro and small sized asset management & custody banks, and business development companies (BDC). The fund benchmarks itself against MVIS US Business Development Companies Index (MVBIZDTG), which is composed of mostly BDCs. “BDCs are vehicles whose principal business is to invest in, lend capital to or provide services to privately-held companies or thinly traded U.S. public companies.” More than 86% of its portfolio consists of small and micro financial institutes in terms of market capitalization.
Investment management firms are engaged in buying, selling and investing in securities and other financial instruments for a particular fund. These funds can be of several types such as mutual funds (MF), exchange traded funds (ETF), pension funds, unit linked insurance plans (ULIP), etc. The firms appoint qualified managers to oversee such a portfolio of investments, with an objective of delivering return to the investors who invested their money in that particular fund. Van Eck Associates Corporation is also such an investment management firm.
Custodian banks on other hand hold customers’ securities for safekeeping to prevent them from being stolen or lost. Investment advisors or managers are required to arrange a custodian for the assets they are managing on behalf of their clients. Investment advisory firms routinely use custodians to safeguard the assets they manage for their clients. Custodian banks also offer related services such as account administration, transaction settlements, dividend collection, interest payment, tax support, foreign exchange management, etc.
VanEck BDC Income ETF was formed on February 11, 2013 and has paid steady quarterly dividends since its inception. BIZD has a current yield of 8 percent, and has also recorded an annual average yield of almost 8 percent over the past 10 years. During the past eight years, this ETFs average annual yield has ranged between 6.5 percent to 12 percent. Nonetheless, this small sized asset management ETF with a market capitalization of $3.4 billion, has been a dividend paymaster. However, BIZDs had very poor price returns. Since its inception in 2013, BIZDs price had fallen by 13.5 percent, and over the past 10 years and 5 years, BIZDs market return was negative 12.64 percent and 6.67 percent respectively.
Price growth during the short and medium term however, has been positive. Considering the pandemic related market crash during March & April 2020, a 6.5 percent price growth over one year and 8.5 percent price growth during the past three years, brings some attractiveness to this ETF. These returns are surely not impressive, but an average annual dividend yield of 8 percent, assures a double digit total return. Thus overall this ETF has been quite successful during the pandemic period.
However, VanEck BDC Income ETF has an exceptionally high expense ratio of more than 10 percent. This undoubtedly is a major problem, as this suggests that whatever weighted average return all the 25 stocks (of BIZD’s portfolio) will generate, investors will not be able to enjoy even 90 percent of that return. This might be the reason behind the extremely low price multiples of this ETF. With an average P/E of 6.23 and a P/B ratio of 1.04, this diversified ETF surely seems undervalued compared to the stock market in general.
An analysis of VanEck BDC Income ETF’s top holdings reveals that 50 percent of its fund is invested in only five equities – Ares Capital Corp. (ARCC), FS KKR Capital Corp. (FSK), Owl Rock Capital Corp. (ORCC), Main Street Capital Corp. (MAIN), and Hercules Capital Inc. (HTGC). Barring MAIN (5.78 percent of total portfolio), all other stocks have outperformed BIZDs return in the past one year, ranging between 7 percent to 11 percent.
As these five stocks constitute half of the entire portfolio, the returns of these stocks will primarily set the trend. This makes this ETF an extremely risky one. However, the most interesting part is their historical yield. All these five stocks are dividend paymasters, generating a yield between 7 to 13 percent over the past 10 years. Average annual yield of these stocks were – ARCC (9.5%), FSK (12.8%), ORCC (7%), MAIN (7.9%), HTGC (9.8%).
A strong argument can be built against the investability of VanEck BDC Income ETF. As there is no historical consistency of price growth, and none of its major holdings have generated high growth, there is hardly any certainty of future price growth and investors have to rely only on dividend income which has a historical yield of 8 percent. In absence of price growth, this high yield may not be sustainable too.
However, I am of the opinion that this high yield is sustainable as the dividend income is generated on the basis of high yield generating stocks, not out of the price growth. A close to double digit yield is good enough to attract investments. On top of that a positive return will only add to the wealth of the investor. Since the price multiples are exceptionally low and all the short term simple moving averages are placed above its long term simple moving averages, I expect the stock to record positive price growth in the coming months. A very interesting observation about VanEck BDC Income ETF’s equity share is that its 52-week low price is only at 12 percent discount to its 52-week high price. This implies that the stock saw a very low level of volatility during the past one year. It won’t be wrong to assume that even in case of downward movement, BIZD’s price will not fall drastically.
However, one can’t ignore the risk of significant downfall too. A negative price return over a longer period will eat out a significant portion or the entire dividend yield and make this fund a loss making option. Looking from a long term view point, I’d like to hold this ETF and enjoy the close to double digit dividend yield. However, it’ll be foolish to not do anything to protect myself from negative price growth. I’d certainly like to cover my exposure by buying a put option for an exercise price close to the current market price of $17.6.
August 19 (4.5 months forward) put options are available for a strike price of $14, $15, and $16. In order to minimize my loss, I’ll buy the put option with the highest exercise price, i.e. $16, for a premium of $0.55. In that way, I won’t have to suffer a loss, if the price falls below $15.45, and thus I’ll be able to minimize my loss up to 12 percent from the current market price. With an objective of enjoying a steady and strong dividend yield, holding this stock together with a protective put hedging strategy will perfectly suit my investment objective.
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