Prefab Specialized ETF or Do It Yourself Custom BDC

The Prefab ETF for Business Development Investing

You Don’t Always Get What You Pay For – even in ETFs.

You don’t have to buy the stocks of individual Business Development Companies (BDCs) but sometimes you might do well to press the pause button before buying something specialized like BIZD. BIZD is “VanEck Vectors BDC Income ETF.” It has a yield of 8.02% so it seems like a good idea. I did some digging, and what I discovered caused me to stick with my custom solution. My custom solution is to pick individual BDC company stocks like ARCC, ORCC, MAIN, and TSLX.

What is Wrong with BIZD?

BIZD does hold some of the BDCs that I like and own. For example, ARCC, ORCC, MAIN, and TSLX are in their top ten. They also own shares of some other BDCs I like: NEWT, GAIN, and CSWC. The problem is that they buy BDCs for high dividend yield, and that often is a problem. It makes their 8% yield very attractive, but at a terrible expense.

If you look at the five-year results for their 26 holdings, half of them (13) have declined in value in the last five years. While some of their picks have nice gains, the extra garbage they have included in their mix creates an overall drag on their returns. Three of the 26 that had good 5-year returns are smaller investments. If you look at the following illustrations, you will see BIZD’s one-year gain and five-year gains for their top ten.

The five-year returns tell an interesting story. One-year looks good until you see the 5-year.

The Twenty-Six

The following image shows all 26 investments. The ones with the green shading are the ones I own. They are my custom-built BDC “ETF”. However, my “ETF” doesn’t have any expense charges.

Top Ten Holdings Dividend Yield

As the following illustrates, most BDC’s have some high dividend yield. The yields range from 6% for MAIN all the way up to 11.27%. However, FSK is not a good BDC investment, in my opinion. Its five-year return is -40%. Therefore, what you get in a good yield, you quickly lose in the value of your investment. That is a recipe for disaster.

BIZD Top Ten Holdings include some real stinkers.

Pay Me Monthly

The final problem with BIDZ is that it pays a quarterly dividend. That, by itself, isn’t really terrible because most ETFs and stocks pay quarterly. However, MAIN, GAIN and PSEC are BDCs that pay a monthly dividend. Guess who gets to use the cash until they pay it out to the ETF shareholders. Perhaps VanEck can’t use it, but it is silly to delay receipt of a monthly dividend.

BIZD holds onto monthly dividends and pays them quarterly.

Conclusion

I prefer my custom-built house of BDC’s to something like BIZD. I can pick quality, get timely dividends when they are paid, and not have to pay expenses.