Unit Investment Trusts appear on many Finra exams. We thought it may be helpful to review them here.
A unit investment trust (UIT) may look like a mutual fund but it is not. Similar to a mutual fund, a UIT is required to register with the SEC under the Securities Act of 1933 and the Investment Company Act of 1940. UIT portfolios are created to meet a stated investment objective, just like to a mutual fund. However, unlike a mutual fund, these portfolios are not actively managed. Instead, once created, a UIT follows a buy and hold strategy.
A mutual fund can continue to issue new shares theoretically for perpetuity. A UIT, however, will cease to exist after a specific date, often call the termination date. The date when the trust will terminate or dissolve is established upon the creation of the UIT. If securities remain invested in the portfolio on the termination date, they will be liquidated and the proceeds paid to the investor.
Some UITs are in existence for as little as one year. Others have a life that spans more than 50 years. Due to the buy and hold strategy and time horizon, there may be instances where the securities within the UIT are worthless, upon dissolution. Therefore, as with all investments, the amount received upon sale or dissolution may be less than the original investment; a profit is not guaranteed.
A UIT can be organized under a contract of custodianship or agency, trust indenture, or a similar instrument and therefore, it is not required to have a board of directors. The UIT will issue redeemable securities or units that represent an undivided interest in a portfolio. Unlike mutual funds, this fixed portfolio is issued through a one-time public offering.
The UIT stands ready to redeem (buy back) the investors units at their calculated net asset value (NAV). In addition, a UIT sponsor will often maintain a secondary market allowing investors to purchase previously redeemed units.
Types of UITs
The sponsor will also be responsible for selecting the securities, which will compose the portfolio, keeping in mind its overall investment objective. Portfolios are created using equity securities or fixed income securities.
Some UITs mirror a specific index. Other portfolios are created using a quantitative selection process chosen by the sponsor. Another strategy is to create a series of short-term trusts that investors can use as part of their long-term investment planning. When a short-term trust is ready to dissolve, the investor is given the opportunity to invest in the next trust in the series, therefore maintaining a long-term strategy. Investors who rollover their money into the next trust usually receive discounted sales charges (more about these soon). Whether long-term or short-term, the trust is supervised by a professional investment manager.
Equity Unit Investment Trusts have portfolios consisting of domestic and/or international equity securities that are constructed to meet various investment objectives. Common objectives for an equity UIT include capital appreciation and income. The portfolio of an equity UIT with a capital appreciation objective would be invested in growth or aggressive growth stocks, while an equity UIT with an income objective would invest in preferred stock or dividend paying common stock.
Fixed Income Unit Investment Trusts feature portfolios primarily consisting of fixed income securities such as bonds. These portfolios can include both international and domestic securities that can provide a steady stream of income. Some trusts may be created with the objective of providing a tax advantages to investors while others are more conservative and seek capital preservation.
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—Securities Training Corporation