BIZD: Strong Q4 Earnings And A Promising 2023 Outlook Hint Robust Returns

The majority of VanEck Vectors BDC Income ETF (NYSEARCA:BIZD) holdings generated record-breaking investment income in the fourth quarter of 2022. Moreover, future fundamentals also indicate that business development firms will continue to generate robust investment income growth in 2023. Higher interest rates, floating nature portfolios, and increased demand for alternative financing are likely to support growth trends. Due to this, high-yielding BDCs are poised to pay higher regular, supplemental, and special dividends to investors in 2023. Furthermore, the momentum of the share price would be supported by low valuations coupled with ongoing earnings growth. Overall, BIZD appears to be the best ETF to buy and hold in 2023, owing to BDCs' strong fundamentals, which enable them to perform well in both bull and bear markets.

Q4 Earnings and 2023 Outlook

Despite the fact that the performance of S&P 500 companies remained subpar in Q4 and the index is expected to post its first year-over-year drop in quarterly earnings since Q3, business development firms have broken their previous records in terms of portfolio growth, investment income, and cash returns. For example, the largest BDC, Ares Capital (ARCC), which makes up 20% of BIZD's portfolio, reported a record fourth-quarter core EPS of $0.63, far exceeding the consensus estimate of $0.56 per share. Despite increasing dividends by 15% year over year in 2022, the company still had $678 million in spillover income at the end of the year, which is more than 2.5 times the current regular quarterly dividend rate. A significant amount of spillover income points to dividend stability and the potential for future dividend increases in 2023.

The company's 2023 outlook is also promising, thanks to high-interest rates and a growing investment portfolio. Ares, like other BDCs, will benefit from higher interest rates in 2023, as 88% of its portfolio investments were at floating rates at the end of 2022. According to Wall Street estimates, Ares could earn a record $2.37 per share in 2023, up from $2.02 per share in 2022. The company received an "A" grade for earnings revision from the Seeking Alpha quant system because 11 analysts increased their 2023 earnings forecast while only one analyst decreased their estimates.

FS KKR Capital (FSK), BIZD's second-largest stock holding, has yet to report fourth-quarter earnings, but Wall Street estimates that FS KKR Capital will post record earnings of $2.93 per share in 2022, up from $2.76 per share last year. Hercules Capital (NYSE:HTGC), one of BIZD's top five large stock holdings, also reported record fourth-quarter earnings of $0.47, exceeding the $0.41 consensus analyst estimate. For the full year, its total net investment income rose by 25% over the previous year to a record-breaking $188 million. The company expects 2023 to bring in yet another record amount of net investment income, thanks to portfolio growth and high-interest rates. The fourth quarter of 2022 is also expected to be the best ever for Main Street Capital (NYSE:MAIN), and the upward trend in its net investment income is likely to continue into 2023.

Additionally, BIZD's rest of the top 10 stock holdings, including Prospect Capital (PSEC), Sixth Street Specialty Lending (TSLX), and Golub Capital (GBDC), reported significant earnings growth in the fourth quarter. These BDCs also expect investment income to continue to grow in 2023 as well.

A Distinct Potential to Performing Well in Bear and Bull Scenarios

Unlike the majority of S&P 500 companies, the fundamentals of BDCs remained strong in 2022, and their net investment income increased significantly from previous years. As a result, the VanEck Vectors BDC Income ETF's total returns have significantly outperformed total S&P 500 index returns in 2022, making it one of the best income-producing ETFs to hold during a bear market.

Interestingly, BDCs are one of the few stock market segments that have the potential to outperform broader market trends in both bullish and bearish market conditions. They performed well during the bull markets of 2020 and 2021, and the recent upside price movement demonstrates that BDCs can perform well if the rally continues into the following quarters of 2023. The broader BDC ETF BIZD has produced total returns of more than 9% year to date, outpacing the S&P 500's return of about 7%. Indeed, many business development firms have generated double-digit returns for shareholders so far in 2023. BDCs' ability to perform well in both bull and bear markets is driven by the high demand for alternative financing. According to data from Pitchbook, the total amount of loans in BDC portfolios rose from $109 billion at the end of 2019 to $188 billion in the second quarter of 2022, a 73% increase. The size of the syndicated loan market, in contrast, grew by 20% over the same time period. In 2023, as the Fed plans to tighten monetary policy even further, venture capital investments are probably going to remain weak, and it will be harder for startups to get financing from traditional lenders. As a result, there will probably be a higher need for alternative financing.

On the other hand, the high-interest rate environment is also likely to enhance their net investment income growth trends. According to Fitch data, 90% of BDC portfolio loans are floating, while 50% of their debt is fixed. Overall, it seems that the emerging industry's solid fundamentals position it to thrive in both bullish and bearish market conditions.

Why Choose BIZD?

Instead of investing in a single BDC that exposes investors to a variety of risks, it is better to purchase a stake in the VanEck Vectors BDC Income ETF, which provides broader coverage of the BDC industry. It has stakes in 25 high-quality BDCs, with the top ten holdings accounting for roughly 75% of the portfolio. Another appealing feature of BIZD is its high trading volume. Over the past three months, its daily average volume has been 440% higher than the median for all ETFs. The fund has a dividend yield of more than 10%. BIZD raised its dividend in 2022, and given the positive outlook of its portfolio holdings, it is likely to do so again in 2023.

I have already covered the outstanding financial results of its top ten portfolio holdings under the subheading "Q4 earnings and 2023 outlook." Besides these BDCs, the firm's portfolio also includes a number of other reputable business development firms, such as Cion Investment (CION), Fidus Investment (FDUS), Gladstone Capital (GLAD), TriplePoint Venture Growth (TPVG), and many others. In the last twelve months, the returns of CION Investment Corporation have outperformed the S&P 500. In 2022, it announced a massive $0.27 special dividend as well as a 10% increase in its quarterly base dividend. Similarly, Fidus Investment generated significant returns for shareholders in 2022 through share price appreciation and dividends.

In Conclusion

Investing in stocks and ETFs with strong fundamentals and the potential to perform well in both bullish and bearish scenarios makes sense right now because it's unclear whether we're exiting the bear market or transitioning into a bullish trend. As a result, it appears prudent to invest in the high-yielding VanEck Vectors BDC Income ETF, which has the potential to outperform market returns in both bull and bear markets. Its diverse portfolio of 25 top-tier BDCs also mitigates the numerous risks associated with a single stock investment. Its shares have outperformed the S&P 500 so far in 2023, and high trading volumes indicate that there is strong buying pressure.