Unit Investment Trusts: How To Use Them Wisely

A unit investment trust (UIT) is a type of investment company that offers a fixed portfolio of stocks and bonds to investors. UITs are comparable to mutual funds but differ in that they are not actively traded and have a stated expiration date. The key advantage of UITs is that they provide investors with a simple, diversified investment option. The fixed nature of UITs, however, can be a drawback for investors who prefer a more active approach. UITs are designed to be held for the life of the fund, but investors can usually redeem their shares early if their investment goals change.

UITs are a type of investment company

Unit Investment Trusts (UITs) are a type of investment company. They are professionally selected pooled investment vehicles that raise money by selling shares known as "units" to investors. Each unit represents an ownership slice of the trust and gives the investor a proportional right to income and capital gains generated by the fund's investments.

UITs are similar to mutual funds and closed-end funds in that they all consist of collective investments in which many investors combine their funds to be managed by a portfolio manager. However, unlike mutual funds, UITs have a stated expiration date based on the investments held in its portfolio. When the portfolio terminates, investors receive their cut of the UIT's net assets.

UITs are bought and sold directly from the company that issues them, although they can sometimes be bought on the secondary market. They are designed to provide capital appreciation and/or dividend income.

There are two primary categories of UITs: equity (stock) trusts and fixed-income (bond) trusts. Within these categories, there are different types of UITs with varying investment strategies. These include strategy portfolios, income portfolios, diversification portfolios, sector-specific portfolios, and tax-focused portfolios.

UITs offer investors a simple way to diversify their investments. The visibility into the trust and fixed investments makes UITs easy for individuals to understand. However, the fixed nature of UITs can be a drawback for investors who prefer a more active approach. UITs also carry risks, including market risk, interest rate risk, and credit risk.

They pool money from multiple investors

Unit Investment Trusts (UITs) pool money from multiple investors, which is then used to purchase a fixed portfolio of securities, such as stocks or bonds. This is known as a "buy and hold" strategy. Each unit represents an ownership slice of the trust and gives the investor a proportional right to income and capital gains generated by the fund's investments.

A UIT is a type of investment vehicle that pools money from multiple investors. The pooled money is then used to purchase a fixed portfolio of securities, which can include stocks, bonds, or other securities. The UIT sponsor selects the portfolio of securities, which is then deposited into the trust for a specified period of time. The length of time is usually between 13 months to 30 years, depending on the underlying securities.

The UIT sponsor will set forth various investment terms, such as the trust objective, the securities to be placed in the trust, when the trust will end, and any fees and expenses to be charged. These terms are detailed in the prospectus, which should be carefully reviewed before investing in a UIT.

By pooling money from multiple investors, UITs offer individuals a simple way to diversify their investments. This diversification can help to reduce the risk of losses due to the underperformance of any single security. UITs also provide greater transparency into their holdings and investment strategies, as they are required to regularly disclose their portfolios.

It's important to note that UITs are not actively traded, which means that the securities in the portfolio remain fixed over the life of the investment. This can be a drawback for investors who prefer a more active approach. Additionally, UITs carry various risks, including market risk, interest rate risk, and credit risk.

They offer a fixed portfolio of stocks, bonds or other securities

A Unit Investment Trust (UIT) is a publicly traded investment company that offers investors a fixed portfolio, providing access to a basket of securities, typically stocks and bonds, but also other asset classes such as commodities or real estate. The key feature that distinguishes UITs from other investment companies, such as mutual funds, is that they offer a fixed, unchanging portfolio, providing a unique set of benefits and characteristics for investors.

When an investor buys into a UIT, they are purchasing a proportional share of the underlying securities held within the trust. These underlying securities are selected by the UIT sponsor, who creates and manages the portfolio according to a specific investment strategy or theme. This strategy could be focused on a particular industry, sector, geographic region, or it could be based on specific investment goals, such as income generation or capital appreciation.

The fixed nature of the portfolio means that once the UIT is created and offered to investors, the composition of the portfolio does not change. The UIT will hold the same securities in the same proportions for the life of the trust, which is typically a fixed period, often between 10 and 50 years. During this time, investors can buy and sell their units on the open market, with the unit price fluctuating based on supply and demand, as well as the performance of the underlying securities.

By offering a fixed portfolio, UITs provide investors with several benefits. Firstly, investors know exactly what they are investing in, as the portfolio is transparent and does not change. This provides a level of certainty and stability, as investors can easily assess the risk and return characteristics of the UIT before investing. Secondly, UITs provide instant diversification, as each unit represents a proportional share of a diversified basket of securities, which may be challenging or costly to replicate individually. Finally, UITs offer a long-term investment horizon, as the fixed portfolio is designed to be held for the specified duration, shielding investors from the temptation to make short-term, emotionally driven investment decisions.

They are not actively traded

A Unit Investment Trust (UIT) is a company that offers a fixed number of shares in a portfolio of securities, which it then invests in according to a set strategy. UITs are typically not actively traded, meaning they are bought and sold on the stock market like a traditional mutual fund or exchange-traded fund (ETF). Instead, investors purchase units of the UIT directly from the company or a broker

They are designed to be held for the life of the fund

Unit Investment Trusts (UITs) are designed to be held for the life of the fund. This means that once a UIT sets its portfolio, it remains the same for the life of the fund (unless there are major corporate events, such as a merger or bankruptcy). The portfolio is not actively traded and follows a buy-and-hold strategy.

The life of a UIT fund can range from 13 months to 30 years, depending on the underlying securities. The termination date of a UIT is the date when the trust will dissolve. This date is specified at the time the UIT is created and is determined by the maturity date of the investments. For example, in the case of a UIT investing in bonds, the termination date will be based on the maturity date of the bonds.

UITs are designed to follow an investment objective over a specified time period. While there is no guarantee that the objective will be met, UITs provide investors with a simple, long-term, hands-off investment option.

At the end of the life of the fund, investors in a UIT have several choices. They can do nothing and receive their portion of the proceeds from the liquidation of the portfolio. They can roll over their investment into a new series of the same or a different UIT. Or, in certain circumstances, they can request an in-kind distribution and receive their portion of the trust in the form of stock in the underlying investments.

Frequently asked questions