Business Development Company (BDC) ETFs Slide as Private Credit Risks Weigh on Investor Sentiment

Why BDCs are noteworthy right now

A BDC is a pass-through lending vehicle. It does not pay corporate income tax as long as it distributes most of its earnings. In exchange, it lends money directly to middle-market private companies, mostly through senior, first-lien, floating-rate loans.

In plain English, BDCs behave like direct lenders. They earn high interest from borrowers that can’t tap traditional bond markets, and then pay that cash out to shareholders, often monthly or quarterly, at yields that can reach well into the teens.

Here is the problem. BDC ETFs — which bundle baskets of these lenders — have been weak year-to-date. Part of that is sentiment. Investors are starting to ask whether stress in private credit could spill over into BDC loan books. Some BDCs are trading at steeper-than-normal discounts to their reported net asset value (NAV), which tells you the market doesn’t fully believe the marks on those loans.

You’re also seeing concern around aggressive practices like payment-in-kind, or PIK, where a borrower “pays” interest by adding more debt instead of sending cash. That props up stated yields in the short term, but it’s also a sign that the borrower is strained.

In short, leverage levels inside some BDCs, sector concentration in cyclical industries, and the lack of transparency around workout recoveries are all being watched more closely now.

Active versus passive BDC ETFs

BDC ETFs have become popular with yield-focused investors thanks to their eye-catching income potential. There are only two notable options in this space, and both are down year to date, but how they’re built makes a significant difference in long-term results.

First up is the VanEck BDC Income ETF

, which tracks the MVIS U.S. Business Development Companies Index. That benchmark weights BDCs by market capitalization—essentially giving the largest, most heavily traded names the biggest allocations.

I’m not a fan of this approach. Market cap weighting may work fine for traditional equities, where larger firms often have more diversified earnings, but in BDCs, size doesn’t necessarily reflect portfolio quality.

A large BDC might be heavily levered, concentrated in cyclical loans, or more aggressive in marking its assets, while smaller ones can be better managed and more conservative. In short, market cap is a poor proxy for credit discipline.

Performance-wise, BIZD hasn’t been weak. It currently pays a 9.14% 30-day SEC yield and has posted a 15.54% annualized total return over the past three years. However, its 12.86% expense ratio looks alarming at first glance—but that figure is misleading.

Under a 2006 SEC rule for “funds of funds,” ETFs like BIZD must report acquired fund fees and expenses (AFFEs), which represent the fees charged by the underlying BDCs in which the ETF invests. These are indirect expenses, not costs paid directly by the ETF itself. In practice, investors don’t actually bear a 12% annual fee drag, and those AFFEs don’t show up in the fund’s financial statements.

The more thoughtful alternative, in my view, is the Putnam BDC Income ETF

. It’s much smaller, with about $247 million in assets compared with BIZD’s $12.6 billion, but I prefer its active approach.

Instead of simply ranking BDCs by size, portfolio manager Mike Petro evaluates each holding using more fundamental metrics—things like non-accrual rates, portfolio yield on cost, net investment income (NII) growth, leverage ratios, and management fee alignment. These are the same factors institutional analysts use when grading BDC quality.

Because the investable BDC universe is relatively small, PBDC’s holdings overlap significantly with BIZD’s. Even so, since its launch, the fund has consistently added value through active positioning. Over the same three-year period, PBDC delivered an 18.74% total return, outperforming both BIZD’s 15.54% and the S&P BDC Index’s 16.18%, while maintaining a comparable 9.81% 30-day SEC yield.

I think for investors seeking BDC exposure, PBDC shows that active management can still make a difference—especially in a niche corner of the market where quality, discipline, and portfolio construction matter more than sheer size.

Please note that this article reflects the author’s personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.