A BDC is a business development company. BDCs provide financing to small and midsize private companies. Formally speaking, most BDCs are closed-end funds that hold a portfolio of loans and trade on the stock market. BDCs distribute to their investors most of the net income from the private companies they lend to.
What do BDCs do?
- They issue loans to small and middle-market non-public businesses
- They collect interest and fees on the loans they issue
- BDCs, given their status as registered investment companies under the Investment Company Act of 1940, are required to distribute at least 90% of their net investment income to shareholders
How can investors access BDCs?
- There are publicly traded and non-public BDCs. Investors can access them through direct investment or by owning their publicly listed equities
- When an investor purchases a BDC, they receive equity in the investment company. The underlying investment company owns a portfolio that is typically composed primarily of private market loans
Putnam BDC Income ETF (PBDC)
Investing in companies offering income to public investors through private market exposure
What are the potential benefits of BDC exposure?
- Attractive yields: Yields typically range from 8% to 10%2
- Portfolio diversification: Historically, low correlation to other asset classes
- Well positioned for differing rate environments: BDCs can balance their portfolios with diversified loan structures
- – Rising rates: Many BDCs issue floating-rate loans
- – Low rates: Many loans are structured with interest-rate floors or prepayment penalties
What is the correlation of BDCs to other asset classes?
- BDCs are equity securities, and they have the investment risks of equities. Although they offer attractive yields, they are not fixed income securities
Correlations: 3-year weekly correlations of total return, September 2018–June 20222
What are BDC risks to consider?
- BDC securities have interest-rate exposure, as their primary source of income is through loan issuance
- BDCs have credit risk, as some companies may default on their loans. BDCs lend to smaller, more capital-constrained companies. While BDC management teams evaluate the risk, the possibility of default exists
- BDC securities are equity securities and can lose value
- Based on weekly yields over five years through August 31, 2022, tracked by Bloomberg, and the yield of the S&P BDC Index tracked by S&P.
- Bloomberg, as of June 30, 2022. BDCs are represented by the S&P BDC Index; High-yield bonds by the ICE BofA U.S. High Yield Index; Equity REITs by the FTSE NAREIT All Equity REITs Total Return Index; Mortgage REITs by the FTSE NAREIT Mortgage REITs Property Sector Total Return Index; Russell 2500 Index by the Russell 2500 Total Return Index; Investment-grade bonds by the S&P 500 Investment Grade Corporate Bond Total Return Index; Leveraged loans by the Morningstar LSTA US Leveraged Loan Total Return Index; Emerging market bonds by the Credit Suisse Emerging Markets Corporate Bond Industrial Total Return Index; MSCI World Index by the MSCI World Net Total Return USD Index.
Past performance is not a guarantee of future results. Indexes are unmanaged and do not incur expenses. You cannot invest directly in an index.
Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV, and are not individually redeemed from the fund. Brokerage commissions will reduce returns. Key risks for each fund are below.
Consider these risks before investing: Business development companies (BDCs) generally invest in less mature U.S. private companies or thinly traded U.S. public companies, which involves greater risk than well-established publicly traded companies. The fund will be sensitive to, and its performance will depend to a greater extent on, the overall condition of the financials sector.
The use of leverage by BDCs magnifies gains and losses on amounts invested and increases the risks associated with investing in BDCs. A BDC may make investments with greater risk of volatility and loss of principal than other investment options and may also be highly speculative and aggressive. Certain BDCs may also be difficult to value since many of the assets of BDCs do not have readily ascertainable market values.
As a non-diversified fund, the fund invests in fewer issuers and is more vulnerable than a more broadly diversified fund to fluctuations in the values of the securities it holds. Our investment techniques, analyses, and judgments may not produce the outcome we intend. The investments we select for the fund may not perform as well as other securities that we do not select for the fund. We, or the fund’s other service providers, may experience disruptions or operating errors that could have a negative effect on the fund. You can lose money by investing in the fund.
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For informational purposes only. Not an investment recommendation.
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Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.