Unit Investment Trust UIT Definition and How to Invest

A unit investment trust (UIT) is an investment company that offers a fixed portfolio of stocks and bonds to investors for a specific period of time. UITs, along with mutual funds and closed-end funds, are classified as investment companies.

UITs are similar to open-ended and closed-end mutual funds in that they consist of collective investments managed by a portfolio manager. They can be bought and sold directly from the issuing company or on the secondary market, and they are typically issued through an initial public offering (IPO).

Unlike mutual funds, UITs have a stated expiration date based on the portfolio’s investments. When the portfolio terminates, investors receive their cut of the net assets. UITs are not actively-traded, meaning securities are not bought or sold unless there’s a change in the underlying investment.

Investment companies offer individuals the opportunity to invest in a diversified portfolio of securities through UITs. UITs are sold by investment advisors, and owners can redeem the units to the fund or trust without trading on the secondary market. UITs are either regulated investment corporations (RICs) or grantor trusts, granting investors ownership in the underlying securities.

Investors can redeem mutual fund shares or UIT units at net asset value (NAV). Closed-end funds are not redeemable and are sold in the secondary market at the current market price.

UITs typically have a set maturity date of 12 to 24 months during which securities cannot be sold.

There are different types of UITs, each with a different investment strategy:

– Strategy Portfolio: Strives to beat a market benchmark using fundamental analysis.

– Income Portfolio: Strives to generate dividend income.

– Diversification Portfolio: Strives to diversify assets across a broad range of investments.

– Sector-Specific Portfolio: Focuses on a specific or niche market, often higher risk.

– Tax-Focused Portfolio: Invests in tax-benefit or tax-deferred investments.

Compared to mutual funds, UITs have specific differences:

– End Dates: UITs have clearly defined start and stop schedules, while mutual funds are open-ended.

– Number of Shares: UITs have a limited number of shares, whereas mutual funds allow for trading.

– Level of Activity: UITs are not actively managed, while mutual funds aim to outperform benchmarks.

UITs have advantages and disadvantages:

Pros:

– Access to a diversified portfolio, reducing the risk of underperformance.

– Regular portfolio disclosures for greater transparency.

– Passive investments with lower fees and greater tax efficiency.

– Accessibility with low minimum investment requirements.

– Predictable performance due to fixed portfolios and strategies.

Cons:

– Lack of control over trust investments.

– Limited diversification compared to other investments.

– Long-term nature may not suit investors needing quick access to funds.

– Limited information on fees, expenses, and future plans.

UITs are generally structured as pass-through entities, resulting in tax efficiency for investors. Income, gains, and losses are passed through to the investor for tax purposes.

UITs carry various costs, including sales charges, management fees, and trustee fees.

Real-world example: Guggenheim’s Global 100 Dividend Strategy Portfolio Series 14 (CGONNX), a UIT focused on dividend income.

UITs pool money from multiple investors to purchase a fixed portfolio of securities and are managed throughout the asset’s life. Undistributed long-term capital gains are reported to shareholders.

The primary benefit of a UIT is its simplicity, allowing investors to understand the holdings, timeline, and risks.

The main risk of a UIT stems from the lack of frequent trading and reevaluation of assets, potentially leading to losses.

In conclusion, UITs offer a passive investment with a fixed portfolio for a predetermined period, providing investors with risk disclosure, diversification, and tax strategies.