BIZD: A BDC ETF Vs. Its Top Holdings

Are you interested in BDC’s, Business Development Companies, but don’t know which one to invest in? There’s an ETF which does some of the heavy lifting for you: The VanEck BDC Income ETF (NYSEARCA:BIZD).

BIZD seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS US Business Development Companies Index (MVBDCTRG), which tracks the overall performance of publicly traded business development companies.

Van Eck Associates Corp. is the fund’s adviser.

As of 12/31/23, BIZD had $827M, with 26 holdings, and average daily volume of 451K. It began trading on ~2/11/13.

BIZD’s expense ratio is listed as 11.17%, most of which comes from Acquired fund fees and expenses: “Van Eck Associates Corporation, (the “Adviser”), will pay all expenses of the Fund, except for the fee payment under the investment management agreement, acquired fund fees and expenses, interest expense, offering costs, trading expenses, taxes and extraordinary expenses. Notwithstanding the foregoing, the Adviser has agreed to pay the offering costs until at least September 1, 2024.”

“Due to an SEC rule addressing funds of funds (such as BIZD), there is a requirement for a fund of funds to report a total expense ratio in its prospectus fee table that accounts for the expense ratios of the underlying funds, including BDCs, in which it invests as an expense item called acquired fund fees and expenses.” (BIZD site)

Holdings:

BIZD’s top 10 holdings form ~75% of its portfolio – these are the largest market cap BDC’s. Within that 75%, the top 3 holdings, Ares Capital (ARCC), FSK, and Blue Owl comprise ~43% of BIZD’s portfolio, with ARCC having by far the heaviest weighting, at ~20%:

The overall BDC industry average Price/Book is currently 1.02X. The majority of BIZD’s top 10 holdings are priced at higher premiums, with the exception of FSK, OBDC, and PSEC, which has the lowest valuation in the group, at .65X. PSEC has been a perennially discounted BDC over the past several years.

Hercules Capital, Main St. Capital, and Sixth Street Lending are priced at the highest premiums to book value, while FSK has the highest base dividend yield, at over 12%.

Dividends:

BIZD pays quarterly distributions. In 2023, its distributions ranged from $.4193 to $.4679. Using the most recent distribution of $.4679, BIZD’s current yield is 11.42%. It should go ex-dividend again on ~4/3/24, with a ~4/10/24 pay date.

BIZD’s 5-year dividend growth rate is a modest 3%, which reflects dividend cuts by some BDC’s in the 2020-2021 Covid era. The annual payout bottomed out at $1.40 in 2021, but has since improved to $1.59 in 2022, and $1.75 in 2023.

Performance:

BDC’s had a good performance year in 2023, due to rapidly rising interest rates, which ramped up their earnings. Many of them have a higher % of floating rate investments, with a lower % of floating rate debt.

While BIZD’s price return was 9.56% over the past year, its 11%-plus yield pushed its ~total 1-year return to ~21%, pretty close to the S&P’s ~22% total return. The big difference, though, for income investors is over 50% of BIZD’s total return came from dividends.

Many of BIZD’s top 10 holdings’ 1-year total returns outperformed that of the S&P, including BXSL, FSK, HTGC, MAIN, OBDC, and TSLX, all of which also outperformed BIZD’s 1 year total return.

Notably, BIZD’s biggest holding, ARCC, underperformed the S&P, with a 15% total return, as did PSEC, which had the worst return of the group, at -4.42%, and OCSL, with a 10% total return.

All of BIZD’s top 10 holdings have outperformed the S&P so far in 2024, with Hercules Capital (HTGC) leading the way, up 5.46%; and Sixth Street Specialty Lending (TSLX) in last place, up just .60%, but still ahead of the S&P’s .29% gain. BIZD is up 2.18% ytd.

As of 12/31/23, BIZD’s 3-year NAV return was 17.42%, much higher than its 5- and 10-year returns of 14.26% and 7.28%. Its return from inception was 7.5%:

This chart compares BIZD to some of its top 10 holdings which have been around over the past 10 years. Some of the other BDC’s have more recent inceptions.

Main Street Capital (MAIN) has the highest total return, most closely followed by Ares Capital; with HTGC in the middle, and PSEC modestly outperforming BIZD, which had the lowest return in this group:

Parting Thoughts

The chart above illustrates how dramatically MAIN, ARCC, and HTGC bounced back from their early 2020 COVID lows; while BIZD’s bounceback was much lower.

BIZD can give you more diversification in the BDC sub-sector, but it hasn’t delivered as strong a return as some of its top holdings over the long term.

If you can afford to wait, our advice is to put MAIN, ARCC, and HTGC on your watchlist, and wait for the next big market pullback, at which point you may be able to buy them at a much lower Price/Book and P/NII than their historical averages. If you’re looking to pull the trigger sooner, there are certain other BDCs which are undervalued that are worth a look.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.