Business development companies (BDCs) should benefit significantly from the new federal tax law that slashes the corporate tax rate to 21 percent from 35 percent.
One way to invest in an array of BDCs is by purchasing shares in VanEck Vectors BDC Income ETF (BIZD), an exchange-traded fund (ETF) that is designed to track the performance of such equities. Improved conditions in the business development sector led Jim Woods, editor of the Successful Investing newsletter, to recommend BIZD recently.
The new federal tax law passed in December should be positive for BDCs, confirmed Meredith Larson, product manager at VanEck. However, rising interest rates and U.S. government bond yields have hurt BDCs and the markets amid fears of inflation.
BDCs Mostly Use Floating-Rate Loans
BDCs are structured to navigate rises in interest rates, since more than 80 percent of their debt portfolios typically are floating rate and most of the debt is senior secured, which should offset some of the “negative impact” of further interest rate hikes, Larson said. BDCs, on average, also have had limited their exposure to more “volatile sectors,” such as energy, compared to other asset classes, she added.
As the chart below shows, BIZD has pulled back slightly in 2018 but started ascending again since closing at $15.74 a share on Feb. 5 in the wake of a market correction. However, its share price is starting to recover and may now be offering a chance for investors to purchase the fund at a discount.
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Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce,Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz.
