Understanding the Current Interest Rate Environment
May 06, 2025
Watch Time 4:00 MIN
Business Development Companies (BDCs) provide access to private credit markets, offering high yields and liquidity. Coulter Regal discusses the current elevated interest rate environment and its implications for investors, focusing on the complexities of investing in individual BDCs and introduce BIZD as an alternative.
Understanding the Current Interest Rate Environment
US interest rates in 2025 continue to be characterized as elevated, with the Federal Reserve implementing a slower pace of rate reductions than many had originally anticipated.
This dynamic has led to increased interest in alternative areas of the income market that take advantage of these higher rates, like private credit, which consists primarily of floating rate loans. Business development companies, or BDCs, are one segment of the private credit market that is attracting investors who are seeking high yield, diversification, and ease of access to private markets.
The Role of BDCs in Private Credit & Liquidity
BDCs are investment companies that provide financing, primarily through direct loans to small and mid-sized private businesses who often go overlooked by traditional banking institutions. Interest and fees are collected on these loans and then distributed to BDC shareholders.
BDCs give investors access to the income potential of private credit, a market segment that has traditionally been difficult to access to many. And unlike traditional private credit funds, which often require capital commitments, have lockup periods, and redemption limits, many BDCs offer the distinct advantage of being publicly traded.
Investors can buy and sell shares of BDCs on public exchanges, just like a regular stock, allowing for flexible exposure. This liquidity positions BDCs as a compelling alternative for investors seeking exposure to private credit without sacrificing the ability to adjust their portfolios as market conditions evolve.
Floating Rate Exposure and Income Potential
A key feature of BDCs lies in their high allocation to floating rate loans. When interest rates rise, the interest paid on these loans also increases, boosting BDC investment income and in turn, supporting higher dividends to investors.
This direct link to interest rates can be especially beneficial in elevated rate environments like today, where many BDCs are offering double digit yields.
In lower rate environments, BDCs can still offer attractive income. Interest rate floors embedded into their loan agreements help ensure a minimum yield regardless of how far rates decline.
Additionally, the private credit nature of these loans provides higher spreads over benchmark rates compared to public debt, which further helps preserve income potential across rate cycles.
For instance, during the near zero interest rate period just a couple of years ago, BDCs still delivered upper single digit yields.
Accessing the BDC Market Efficiently
However, a challenge that many investors face when considering allocating the BDCs is selecting from the many that are available in the market today. BDCs are complex entities, each with their own distinct risk profile shaped by management philosophy, underwriting standards, credit profiles, and underlying asset exposures.
Because of this complexity, investing in individual BDCs requires thorough and time-consuming research to fully understand each entity.
BIZD | VanEck BDC income ETF | The Liquid Alternative to Private Credit
The VanEck BDC Income ETF, ticker BIZD, or BIZD, addresses this by offering diversification across the whole BDC industry. By tracking a passive index focused on the most liquid segment of the BDC universe, BIZD provides broad market exposure to a range of BDCs, simplifying the investment process while maintaining the benefits of the asset class. This reduces the burden of individual credit research, providing an efficient solution for investors seeking exposure to this complex asset class.
So, to recap, BDCs offer liquid access to private credit with high income potential and a floating rate structure that is well suited for the prevailing interest rate climate of today. The BDC, the VanEck BDC income ETF simplifies exposure to this diverse asset class, mitigating the complexity of individual BDC selection. As the high interest rate environment persists, BDCs stand out as a compelling option for income-focused investors
IMPORTANT DISCLOSURE
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees. Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic or social instability.
BDCs: MVIS US Business Development Companies Index is a rules-based index intended to track the overall performance of Business Development Companies (BDC).
U.S. High Yield Bonds: ICE BofAML US High Yield Index (H0A0) tracks the performance of U.S. dollar-denominated below investment grade corporate debt publically issued in the U.S. domestic market. Qualifying securities must have a below investment grade rating.
REITs: FTSE NAREIT Equity REITs Index is a broad-based, free-float adjusted market capitalization weighted index consisting of equity real estate investment trusts.
U.S. Stocks: Standard & Poor’s 500 Index, calculated with dividends reinvested, consists of 500 widely held common stocks covering the industrial, utility, financial and transportation sectors.
Utilities: Standard & Poor’s 500 Utilities Index comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector.
U.S. Investment Grade Bonds: Bloomberg Barclays Capital US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, commercial mortgage-backed securities.
U.S. 10-Year Treasury Bonds: ICE BofAML Current 10-Year US Treasury Index is a one-security index comprised of the most recently issued 10-year U.S. Treasury bond. To qualify for the inclusion, the 10-year bond must be auctioned on or before the third business day before the last business day of the month.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
Business Development Companies (BDCs) generally invest in less mature U.S. private companies or thinly traded U.S. public companies which involve greater risk than well-established publicly-traded companies. While the BDCs that comprise the Index are expected to generate income in the form of dividends, certain BDCs during certain periods of time may not generate such income. The Fund will indirectly bear its proportionate share of any management fees and other operating expenses incurred by the BDCs and of any performance-based or incentive fees payable by the BDCs in which it invests, in addition to the expenses paid by the Fund. A BDC’s incentive fee may be very high, vary from year to year and be payable even if the value of the BDC’s portfolio declines in a given time period. Incentive fees may create an incentive for a BDC’s manager to make investments that are risky or more speculative than would be the case in the absence of such compensation arrangements, and may also encourage the BDC’s manager to use leverage to increase the return on the BDC’s investments. 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 a larger amount of risk of volatility and loss of principal than other investment options and may also be highly speculative and aggressive. The Fund and its affiliates may not own in excess of 25% of a BDC's outstanding voting securities which may limit the Fund's ability to fully replicate its index. An investment in the Fund may be subject to risks which include, among others, investing in BDCs, investment restrictions, financial sector, small- and medium-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, issuer-specific changes, and index-related concentration risks, all of which may adversely affect the fund. Small- and medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
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