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New BDC Fund Offers High Yields, Potentially High Risks

Obviously anyone buying a BDC believes that the underlying portfolio will more than recover the expense ratio and the dividends paid out which highlights the risk in owning a BDC. Depending on how the portfolio is structured, an adverse event could have a meaningful impact on performance.

Many BDCs are well diversified. For example ARCC's portfolio has 150 holdings and of course buying many BDCs in an ETF offers further diversification versus picking one or two BDCs and being wrong about the ones chosen.

It is important to realize the general risk that goes with investing in BDCs. Many BDCs yield 8% to 9% compared to 0% to 1% for things like money markets. That high of a yield is an indication of higher risk.

During the financial crisis ARCC dropped by 73% and ACAS declined by 98%. A repeat of 2008 is very unlikely but those declines help create some context for the potential risk of BDCs.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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