Inclusion of BDCs in Russell Proxy Indexes

Russell has excluded Business Development Companies from its indexes since the June 2014 rebalance, but they are still included in the Portfolio 123 Russell proxies. I think it would be wise to exclude them.

Most BDCs are simply leveraged securities portfolios, overwhelmingly of fixed-income securities, though a few of them are internally managed. I count 45 of them, mostly in the Russell 2000 capitalization range, so they probably make a decent-sized contribution to the tracking error of the proxy index relative to the actual R2000.

For my modeling purposes their inclusion is a nuisance, because they are stocks for which net asset value (book value) has some relevance. Yet they are lumped together by Capital IQ in the Asset Management and Custody Banks subindustry (40203010), most of whose other constituents are asset-light businesses for which NAV is totally irrelevant.

I have dealt with my modeling problem by creating a list of BDCs, based on symbols that I harvested from a BDC-focused web-site. I have attached a spreadsheet with the symbols, in case anyone else may find it useful. Could we also use a process like this to improve the structure of the proxy indexes?

BDC List.xlsx (8.43 KB)

I was going to remove these stocks, but I noticed that my sim returns went down after removing them.