The BDC business model is to lend to small and midsized companies at high yield equivalent rates while also at times taking equity stakes in such companies. BDCs can also take an active part in assessing the borrower’s prospects and modifying business practices if necessary with the goal of ensuring a favorable
return for shareholders and principals in the company. The combination of making loans and taking equity stakes has the potential for relatively high, stable cash distributions with the additional benefit of capitalizing on the equity performance of the borrower.
Now, BDCs are offered as bundles in ETNs that come as a normal ETN (BDCS) and a 2X leveraged ETN (BDCL) for aggressive investors.
The ETRACS Linked to the Wells Fargo Business Development Company Index due April 26, 2041 (BDCS) is designed to track an investment in the Wells Fargo Business Development Company Index, and may pay a variable quarterly coupon linked to the cash distributions associated with the underlying BDC constituents, less investor fees. BDCS is trading at $22.34 with a quarterly dividend yield of 9.78%. Year to date, BDCS has a market return of 12.5% compared to 9.5% for the S&P 500. Here are the top holdings:
ACAS American Capital Ltd
ARCC Ares Capital Corp
SUNS Solar Senior Capital Ltd
AINV Apollo Investment Corp
FSC Fifth Street Finance Corp
TAXI Medallion Financial Corp
BKCC Blackrock Kelso Capital Corp
SLRC Solar Capital Ltd
HTGC Hercules Technology Growth Capital Inc
MCC Medley Capital Corp
For the most aggressive investors, the ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index (BDCL) is designed to track a leveraged investment in the Wells Fargo Business Development Company Index and pay a variable quarterly coupon linked to the leveraged cash distributions associated with the underlying Business Development Company (“BDC”) constituents, less financing costs and investor fees. BDCL is trading at $20.65 with a dividend yield of 16%% based on its most recent quarterly distribution of $0.8197 in January 2012. Year to date, BDCL has a market return of 24.81% compared to 9.5% for the S&P 500. The portfolio is like BDCS except the ETF is leveraged 2 times.