The Limitation of Putnam BDC Income ETF: A Closer Look
Investing in Business Development Companies (BDCs) through exchange-traded funds (ETFs) can be an effective way to diversify your portfolio and gain exposure to this asset class. However, not all BDC ETFs are created equal. One such ETF that has underperformed compared to other options is the Putnam BDC Income ETF (PBDC).
At first glance, PBDC may seem like an attractive choice due to its actively managed strategy. However, upon closer inspection, it becomes clear that this ETF lacks the true active management substance that investors might expect. In comparison, my custom BDC portfolio, which consists of smaller, high-conviction picks, has outperformed PBDC and the VanEck BDC Income ETF.
Concentration and Bias in PBDC’s Top 10 Holdings
One of the main reasons for PBDC’s underperformance is the overconcentration and bias towards large-cap BDCs in its top 10 holdings. This limiting strategy can hinder the potential for optimized price-to-risk ratios, as larger companies may not offer the same growth opportunities as smaller, more nimble firms.
- Apollo Investment Corporation (AIC): With a weighting of approximately 13.2% in PBDC’s portfolio, AIC is a significant holding. While it is a well-known BDC with a solid track record, its large size may limit its growth potential.
- BlackRock Business Development Corporation (BDC): Another large holding in PBDC, with a weighting of around 10.2%, BlackRock BDC is another well-established player in the BDC space. However, its size and focus on larger companies may limit its ability to provide the best price-to-risk ratios.
- Prospect Capital Corporation (PSEC): With a weighting of around 8.9%, Prospect Capital Corporation is another large holding in PBDC. Its focus on larger companies may limit its potential for outperformance.
Underperformance: Impact on Individual Investors
As an individual investor, the underperformance of PBDC compared to my custom BDC portfolio can result in missed opportunities for growth and potentially lower returns on investment. By focusing on smaller, high-conviction picks, I am able to capitalize on the growth potential of these firms and achieve better price-to-risk ratios.
Underperformance: Impact on the World
From a broader perspective, the underperformance of PBDC and other similarly managed BDC ETFs can have implications for the overall market. If investors continue to seek out larger, more established BDCs, there may be less capital available for smaller, growing firms. This could limit their ability to access capital and potentially hinder their growth.
Conclusion
In conclusion, while the Putnam BDC Income ETF may appear to be an attractive choice due to its actively managed strategy, its overconcentration and bias towards large-cap BDCs limit its potential for optimized price-to-risk ratios. By focusing on smaller, high-conviction picks in my custom BDC portfolio, I am able to capitalize on the growth potential of these firms and achieve better returns on investment. Furthermore, the underperformance of PBDC and similar ETFs could have implications for the broader market, potentially limiting the ability of smaller, growing firms to access capital and grow.
As an investor, it is important to carefully consider the composition of your BDC ETF holdings and ensure that they align with your investment goals and risk tolerance. By focusing on smaller, high-conviction picks, you may be able to achieve better returns and contribute to a more vibrant and diverse BDC market.
