Exposure To Business Development Companies Now Available Via BDCS ETN

April 28, 2011 by  
Filed under Commentary, ETF IPOs (New ETFs), ETNs

UBS introduced new exchange-traded notes today (4/28/11) linked to both the price and yield performance of the Wells Fargo Business Development Company Index.  The UBS E-TRACS Wells Fargo Business Development Company ETN (BDCS) intends to issue quarterly coupons based on distributions of the underlying companies.  The initial yield for the new ETN should be about 6.84% based on an index yield of 7.69% and the 0.85% annual fee.

Business Development Companies (“BDC”) are publicly traded entities investing in private equity and debt, similar to private equity funds.  To qualify as a BDC, the company must be registered with the SEC and have elected to be regulated as a BDC under the Investment Company Act of 1940.

The typical BDC business model is to lend capital to small and mid-sized companies at relatively high rates, often taking equity stakes as well.  BDCs usually take an active role in guiding the companies they invest in, similar to the role of a Venture Capital firm.  The debt/equity combination of their investments has the potential for relatively high, stable cash distributions with an equity kicker.

According to Wells Fargo Securities, LLC, the index sponsor, the index is a float adjusted, capitalization-weighted index.  However, with the three largest holdings all having exactly 10.0% allocations, it appears that it is really a “capped” index.  It intends to measure the performance of all BDCs listed on the NYSE or NASDAQ.

The underlying index currently has 26 holdings with the ten largest being Ares Capital Corp (ARCC) 10.0%, American Capital Ltd (ACAS) 10.0%, Apollo Investment Corp (AINV) 10.0%, Prospect Capital Corp (PSEC) 9.9%, Fifth Street Finance Corp (FSC) 7.5%, Solar Capital Ltd (SLRC) 5.9%, BlackRock Kelso Capital Corp (BKCC) 5.8%, PennantPark Investment Corp (PNNT) 4.7%, MCG Capital Corp (MCGC) 4.1%, and Main Street Capital Corp (MAIN) 3.2%.

At one time, 90% of the E-TRACS product line was on ETF Deathwatch.  UBS started to turn things around by adding their name to the product line (I think I suggested that) and rolling out a suite of MLP based notes.  They started to backslide with an ETN that was basically a clone of an already well-established product.

Today’s launch should put UBS back on the product recovery path.  BDCS has many things in its favor:  a high yield in a yield-starved market, exposure to a unique asset class, and no competition.  Additional information can be found in today’s press release, the BDCS summary page, fact sheet (pdf), and prospectus (pdf).

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Comments

3 Responses to “Exposure To Business Development Companies Now Available Via BDCS ETN”

  1. Jim Merchant on April 29th, 2011 1:04 pm

    There is also a closed end fund that invests in a basket of BDC’s. It is usually around 80% invested, and is currently selling at a discount of about 4%. It has a yield over 7%, and pays quarterly. It is the First Trust Specialty Finance & Financial Opportunities Fund(FGB).

  2. Ron Rowland on April 30th, 2011 11:51 am

    Thanks for bringing this to my attention Jim.

  3. Leveraged BDC ETN With 14.6% Yield Launched | Invest With An Edge on May 31st, 2011 1:06 pm

    [...] a month ago, UBS introduced the first ETP focusing on Business Development Companies.  Now they are upping the ante with a leveraged version.  The UBS ETRACS 2x Leveraged Long Wells [...]

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