What Is a Unit Investment Trust (UIT)?

A unit investment trust (UIT) is an investment company that offers a fixed portfolio of stocks and bonds as redeemable units to investors for a specific period. It is designed to provide 澳洲幸运5开奖号码历史查询:capital appreciation and/or dividend income. UITs, along with 澳洲幸运5开奖号码历史查询:mutual funds and 澳洲幸运5开奖号码历史查询:closed-end funds, are defined as investment companies.

Understanding Unit Investment Trusts (UITs)

Investment companies offer individuals the opportunity to invest in a diversified portfolio of securities with a low initial investment requirement. UITs are sold by investment advisors and an owner can redeem the units to the fund or trust, rather than placing a trade in the 澳洲幸运5开奖号码历史查询:secondary market.

A UIT is either a ꦇ澳洲幸运5开奖号码历史查询:regulated investment corporatio♒n (RIC) or a grantor trust. A RIC is a corporation in which the investors are joint owners, and a grantor trust grants investors proportional ownership in the UIT’s 澳洲幸运5开奖号码历史查询:underlying securities.

Investors can redeem UIT units (or mutual fund shares) at 澳洲幸运5开奖号码历史查询:net asset value (NAV) to the fund or trust either directly or with the help of an investment advisor. NAV is defined as the total value of the portfolio divided by the number of shares or units outstanding, and the NAV is calculated each business d꧒ay.

On the other hand, closed-end funds are not redeemable and are sold in the 澳洲幸运5开奖号码历史查询:secondary market at the current market price. The market price of a closed-end fu𓆏nd is based on investor demand and not as a calculation of ๊net asset value.

Types of Unit Investment Trusts (UITs)

Though the underlying characteristics of a UIT are often the same across different types of trusts, th🥀ere are different strategies for UITs. These different types will vary in the underlying assets that are purchased and held, as each of the following UITs will have a different investment strategy:

• Strategy portfolio: This type of UIT strives to beat a market benchmark and outperform general investments. This UIT leverages fundamental analysis to determine what investments may beat the market.
• Income portfolio: This type of UIT strives to generate dividend income. It often deprioritizes capital appreciation in favor of generating income.
• Diversification portfolio: This type of UIT strives to diversify the portfolio assets across a broad range of investments. It aims to minimize risks.
• Sector-specific portfolio: This type of UIT strives to focus on a very specific or niche market. This UIT is often higher risk, though this may result in higher profit.
• Tax-focused portfolio: This UIT strives to invest in tax-benefit or tax-deferred investments. This includes investing in state-exempt or federal-exempt fixed-income securities.

Unit Invest Trusts (UITs) vs. Mutual Funds

End Dates

Mutual funds are open-ended funds. This means that the 澳洲幸运5开奖号码历史查询:portfolio manager can buy and sell securities in the portfolio. A UIT, on the other hand, pays interest income on the bonds and holds the portfolio until a specific end date when the bonds are sold and the principal amount is returned to the💝 owners.

Investors may prefer UITs if they want investments with clearly defined start and stop schedules. Keep in mind that a ༺U🐓IT may also be rolled into another UIT if it is part of a series.

Number of Shares

Many investors prefer to use mutual funds for stock investing so the portfolio can be traded. If an investor is interested in buying and holding a portfolio of bonds and earning interest, t🌼hat individual may purchase a UI♛T or closed-end fund with a fixed portfolio. The UIT will have a specified limit on the number of available shares that cannot be merged or split.

Level of Activity

The 澳洲幸运5开奖号码历史查询:investment objective of each mutual fund is to 澳洲幸运5开奖号码历史查询:outperform a particular 澳洲幸运5开奖号码历史查询:benchmark, and the portfolio manager trades securities to meet that objective. For example, a stock mutual fund may have an objective to outperform the 澳洲幸运5开奖号码历史查询:Standard & Poor’s 500 index of large-cap stocks.

UITs🎐 are not actively managed. Assets are purchased upfront and are held for the duration of the trust. In rare casꦏes, trust sponsors may be allowed to exchange the trust assets.

Adva🔯ntages and Disadvantages of U🔜nit Investment Trusts (UITs)

Advantages

Unit investment trusts offer investors a diversified portfolio of securities, which can help reduce the risk of losses due to any single security’s underperformance. Be mindful that some UITs are industry-specific (e.g., 100% invested in healthcare), and these UITs hold greater risk. 

They must disclose their portfolios regularly, providing investors with greater 澳洲幸运5开奖号码历史查询:transparency into their holdings and investment strategy.

UITs are generally 澳洲幸运5开奖号码历史查询:passive investments, which means they do not invo💛lve active management or frequent trading. This can result in lower fees and expenses compared to actively managed funds.

They are typically structured as 澳洲幸运5开奖号码历史查询:pass-through entities, which means they do not pay taxes at the trust level. This can result in greater tax efficiency.

UITs often have low minimum investment requirements, making them accessible to a wider range of investors. More investors may appreciate the simplicity of a UIT. UITs have a fixed portfolio of securities and a set investment strategy. This means their performance is usually more predictable than actively managed funds that may change their holdings and investment strategy over time.

Disadvantages

Because UITs have a fixed portfolio of securities and a set 澳洲幸运5开奖号码历史查询:investment strategy, investors have little control over the investments made by th🎶e trust. In some cases, poor performers are also retained and sponsors usually maintain UIT assets without trading away or cha⛦nging strategy. 

As mentioned before, while UITs do provide some diversification, they typically invest in a specific market sector or 澳洲幸运5开奖号码历史查询:asset class. This means they may not provide the same level of diversification as more broadly diversified investments.

UITs are designed to be long-term investments, so they may not be appropriate for investors who need access to their funds on short notice. UITs are also not traded on exchanges like mutual funds and may incur fees upfront, so investors may have difficulty bu🅺ying or selling units or must be prepared to incur higher costs when purchasing the investment.

In some cases, UITs may not provide as much information about their investment strategy or performance as other types of investments. This includes not having as much transparency around fees, expenses, or plans for changes in assets.

Unit Investment Trusts (UITs) and Taxation

UITs are generally structured as pass-through entities for tax purposes. This means UITs often don’t pay taxes at the trust level. Instead, income, gains, and losses are passed through to the investors in the trust. As a result, investors are responsible for paying taxes on their share of the trust’s income, gains, and losses and the trust is 澳洲幸运5开奖号码历史查询:tax-exempt.

The tax treatment of a UIT can vary depending on the types of securities held by the trust and the investor’s tax situation. For example, if the trust holds stocks or other securities that pay 澳洲幸运5开奖号码历史查询:dividends, the dividends will be passed through to the investor and taxed as 澳洲幸运5开奖号码历史查询:ordinary income. Similarly, if the trust sells securities for a profit, all capital gains are passed through to the investor.

One potential tax advantage of UITs is that they are generally structured as a passive investment. This means that because investments are bought and sold less frequently, they may have lower turnover and generate fewer capital gains than actively managed funds. This can result in greater 澳洲幸运5开奖号码历史查询:tax efficiency for investors looking to minimize their capital gains taxes.

Unit Investment Trust (UIT) Costs

Like other forms of investing, UITs carry with them a variety of costs. Some UITs charge 𝓀a sales charge called a load. This sales charge is typically a percentage of th♎e investment amount.

UITs typically charge a management fee, which is a percentage of the assets held in the trust. The 澳洲幸运5开奖号码历史查询:management fee covers th𓄧e costs of managing the portfolio and other administrative expenses, though these fees may be less than actively managed investments.

UITs also charge trustee fees. These trustee fees cover the costs of the trustee responsible for overseeing the trust. Trustee fees are typically a fixed amount or a percentage of the assets held in the trust, though there may ཧbe other exp⛄enses included specific for legal, accounting, custody, or administration fees.

Real-World Examp🐎le of a Unit Inves🐽tment Trust (UIT)

Guggenheim’s Global 100 Dividend Strategy Portfolio Series 14 (CGONNX) was founded on March 15, 2018, with the intent to provide dividend income. It contained 100 澳洲幸运5开奖号码历史查询:diversified positions: 45.16% invested in 澳洲幸运5开奖号码历史查询:large-cap stocks, 26.94% in midcaps, and 27.90% in 澳洲幸运5开奖号码历史查询:small caps. Roughly half of the securities were invested in U.S. stocks, with the balance invested in many other countries. Allocation reflects many sectors as well. Each company it held represented roughly 1% of the portfolio.&﷽nbsp; 

This UIT was created with a mandatory maturity date of June 17, 2019. Since the maturity date of this UIT, Guggenheim offered new UIT offerings. For example, the Global 100 Dividend Strategy Portfolio Series 24 was created on September 9, 2020, with a mandatory maturity date of December 17, 2021.

The Bottom Line

A UIT is very similar to a mutual fund. However, this investment vehicle often employs a passive investment strategy. Once securities are purchased, a UIT holds the assets for a predetermined amount of time. This gives investors peace of mind knowing the risk and diversification of the portfolio in addition t﷽o knowing the tax strategy of the underlying assets.