Understanding Putnam BDC Income ETF (PBDC) reported fees and expenses
Defining acquired fund fees and expenses (AFFEs)
A fund that invests in BDCs discloses BDC expenses as acquired fund fees and expenses (AFFEs). AFFEs, frequently seen in a fund-of-funds or similar vehicle, are fees associated with an underlying investment. They are shown as a line item in an expense table to distinguish them as fees of the underlying investment (in this case, the investment in the business development company) rather than the fund or vehicle.
AFFEs are the result of a 2006 SEC rule intended to provide investors with increased transparency to see and understand expenses associated with underlying investments. The rule states that registered investment companies (or RICs, also often referred to as ’40 Act Companies) are required to report proportional expenses of other RICs it owns as part of its own fees. A BDC fund discloses AFFEs because the BDCs it invests in are registered investment companies.
Why do AFFEs matter?
AFFEs make the expense ratios look much higher for funds that invest in BDCs (or other RICs) compared with other equity funds. Investors need to remember that AFFEs are indirect expenses not borne by the fund, despite being listed in the fund’s reported expense ratios.
What are the AFFEs and other fees for Putnam BDC Income ETF?
| Management Fees | Distribution and Service (12b-1) Fees | Other Expenses | Acquired Fund Fees and Expenses | Total Annual Fund Operating Expenses |
|---|---|---|---|---|
| 0.75% | 0.00% | 0.00% | 12.74% | 13.49% |
You can find more information under "Fees and expenses" in the PBDC prospectus. (PDF)
How are investors impacted by AFFEs?
Fund shareholders do not pay proportional expenses/AFFEs when BDCs are held in a fund or ETF, despite AFFEs being included in the reported expense ratios. Instead, the BDC investment management fees are reflected in the total return of the BDC security, and thus also in the performance of the overall portfolio’s performance. In other words, the impact of AFFEs is in the performance of the underlying security and the performance of the fund or ETF, not in the amount investors pay in expenses.
If investors don't pay AFFEs, what expenses do they pay?
Investors are impacted by direct expenses, such as management fees or other operating expenses. These do not include the AFFEs.