Professional Documents
Culture Documents
UIT
A UIT typically issues redeemable securities (or "units"), like a mutual fund, which
means that the UIT will buy back an investor’s "units," at the investor’s request, at
their approximate net asset value (or NAV) . Some exchange-traded funds (ETFs)
are structured as UITs. Under SEC exceptive orders, shares of ETFs are only
redeemable in very large blocks (blocks of 50,000 shares, for example) and are
traded on a secondary market.
A UIT typically will make a one-time "public offering" of only a specific, fixed
number of units (like closed-end funds). Many UIT sponsors, however, will maintain
a secondary market, which allows owners of UIT units to sell them back to the
sponsors and allows other investors to buy UIT units from the sponsors.
A UIT will have a termination date (a date when the UIT will terminate and dissolve)
that is established when the UIT is created (although some may terminate more
than fifty years after they are created). In the case of a UIT investing in bonds, for
example, the termination date may be determined by the maturity date of the bond
investments. When a UIT terminates, any remaining investment portfolio securities
are sold and the proceeds are paid to the investors.
A UIT does not actively trade its investment portfolio. That is, a UIT buys a relatively
fixed portfolio of securities (for example, five, ten, or twenty specific stocks or
bonds), and holds them with little or no change for the life of the UIT. Because the
investment portfolio of a UIT generally is fixed, investors know more or less what
they are investing in for the duration of their investment. Investors will find the
portfolio securities held by the UIT listed in its prospectus.
Keep in mind that just because a UIT had excellent performance last year does not
necessarily mean that it will duplicate that performance. For example, market conditions
can change, and this year’s winning UIT could be next year’s loser. To understand the
factors you should consider before investing in a mutual fund, read Mutual Fund Investing:
Look at More Than a Mutual Fund's Past Performance. In addition, before investing in a
UIT, yUITs are regulated primarily under the Investment Company Act of 1940 and the
rules adopted under that Act, in particular Section 4 and Section 26.
First, just like a mutual fund, a unit investment trust is a collection of other investments. In
the bond world, a UIT is a collection of bonds, bond funds or bond derivatives. But unlike a
mutual fund, the investments in a UIT aren't traded by the fund manager. Rather, the
manager buys the investments and holds them until maturity.
Second, buying a UIT is slightly different from buying a mutual fund. The management fees
of a UIT are much lower than those of mutual funds -- presumably because there's not
much "management" required in a buy-and-hold portfolio like a UIT. There are, however,
sales fees associated with UIT. Just like the fees associated with mutual fund loads.
However, with a UIT you'll pay a sales commission to buy, but never to sell.
Third, because a UIT consists of investments that will be held until maturity, a UIT -- unlike
a mutual fund -- also has a maturity date. Some UITs are designed to mature in five years or
so. Others are long-term investments that mature 30 years after creation.
There are three main factors worth noting when considering a UIT for your portfolio. Two
are pros. The other is a con.
On the positive side -- the biggest advantage of a UIT is also the biggest selling point for a
bond mutual fund: diversification.
A UIT holds a number of varied bonds and related investments. And buying a collection of
investments is generally safer than buying a single investment.
Another positive is that the diversified holdings of a UIT don't change. If you own a UIT you
know what bonds are in it. You don't have to wait until your quarterly statement to see
what the fund manager has The third factor, although closely related to the two positive
factors, must be considered a negative. Because a UIT holds a number of bonds within it, a
potential investor should research all the holdings to ensure they meet your individual
tolerance for risk, etc. That can be a time-consuming process. And for many investors it
may be a wiser move to buy less complex investments such as U.S. Treasuries.
bought and what he's sold. So a UIT offers a consistency that can be beneficial to many
investors -- particularly retired people.
References
http://www.investorwords.com/5161/Unit_Investment_Trust.html
http://bonds.about.com/od/bondfunds/a/UIT.htm
http://www.sec.gov/answers/uit.htm
http://www.morganstanleyindividual.com/investmentproducts/unittrusts/