Wed, 13/02/2013 - 12:05
Market Vectors ETF Trust has launched the Market Vectors BDC Income ETF (BIZD), the first exchange-traded fund designed to provide pure-play exposure to business development companies (BDCs).
“Business development companies have traditionally been high-yielding, making them an attractive choice in today’s ongoing search for income,” says Brandon Rakszawski, product manager for Market Vectors ETFs. “Investing in BDCs provides exposure to private companies that many investors could not otherwise access, allowing for potential growth and yield generation.”
BDCs’ principal business is to lend capital or provide services to privately-held companies or thinly-traded US public companies. To qualify as a BDC, a company must be organised under the laws of, and have its principal place of business in the US; be registered with the Securities and Exchange Commission; and have elected to be regulated as a BDC under the Investment Company Act of 1940.
BIZD seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors US Business Development Companies Index, a rules-based index intended to track the overall performance of publicly traded business development companies. To be eligible for the index, a BDC must also have a market capitalisation in excess of USD150m, a three-month average daily trading volume of at least USD1m, and a minimum trading volume of 250,000 shares each month in the previous six months.
Market Vectors says an investment of this kind is not without risks. BDCs invest in private companies and thinly traded securities of public companies, including the debt instruments of such companies, making them potentially susceptible to issues arising out of bankruptcies or defaults. Additionally, limitations on asset mix and leverage may make it difficult for BDCs to raise capital and BDCs may be more adversely affected by market volatility than more diversified investments.
An SEC rule addressing funds of funds (such as BIZD) adopted in 2006, requires a fund of funds to report a total expense ratio in its prospectus fee table that accounts for both the expenses that a fund pays directly out of its assets (sometimes called “direct expenses”), as well as the expense ratios of the underlying funds (including BDCs) in which it invests (often called “acquired fund fees” or “indirect expenses”). The disclosure of the fund’s indirect expenses in the fund’s fee table is contained in the acquired fund fees and expenses (AFFE) line item.
This disclosure is designed to provide investors with a better understanding of the actual costs of investing in a fund that invests in other funds, which have their own expenses that may be as high, or higher, than the acquiring fund’s expenses. Accordingly, the prospectus for BIZD discloses its AFFE which is expected to be 7.16 per cent. However, because these fees are not borne directly by the fund, they will not be reflected in the expense information in BIZD’s financial statements and the information presented in the prospectus table will differ from that presented in BIZD’s financial highlights included in BIZD’s reports to shareholders, when available. The direct expenses that will be borne by BIZD are anticipated to be 0.40 per cent.
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