Unit Investment Trusts (UITs)
Unit Investment Trusts (UITs) are a type of investment company that offers a fixed, unmanaged portfolio of securities with a specific termination date. They share characteristics with both mutual funds and closed-end funds.
What is a UIT?
A UIT is an investment company that:
- Holds a fixed portfolio of securities (no active management)
- Has a termination date when the trust dissolves
- Issues a fixed number of units (like closed-end funds)
- Offers redeemable units (like open-end funds)
- Has no board of directors
Key Characteristics
| Feature | UIT |
|---|---|
| Management | Unmanaged (passive) |
| Portfolio | Fixed at creation |
| Termination | Specific end date |
| Units Issued | Fixed number |
| Redemption | Redeemable with sponsor |
| Board of Directors | None |
Types of UITs
Equity UITs
- Hold stocks selected at trust creation
- Typically 15-24 month term
- Seek capital appreciation and/or dividend income
- At termination, proceeds distributed to unitholders
Bond UITs
- Hold fixed-income securities
- Longer terms (often 15-30 years)
- Pay monthly income
- As bonds mature/are called, principal returned to investors
- Popular for investors seeking predictable income
UIT vs. Mutual Fund Comparison
| Feature | UIT | Mutual Fund |
|---|---|---|
| Management Style | Unmanaged (fixed portfolio) | Actively or passively managed |
| Portfolio Changes | Generally none | Regular buying/selling |
| Termination Date | Yes (specific date) | No (perpetual) |
| Shares/Units | Fixed number | Unlimited |
| Board of Directors | No | Yes (at least 40% independent) |
| Management Fee | None | Yes |
| Dividend Reinvestment | Usually not available | Typically available |
UIT Fees and Expenses
UITs do not charge management fees (since there's no active management), but they do have:
| Fee Type | Description |
|---|---|
| Sales Charge | Front-end load, typically 1-5% |
| Creation & Development (C&D) Fee | One-time fee at creation |
| Trustee Fee | Annual fee for trust administration |
| Operating Expenses | Annual portfolio expenses |
How UITs Work
Creation
- Sponsor selects securities for the portfolio
- Trust is created with specific termination date
- Units are offered to investors
- Portfolio remains fixed (with limited exceptions)
During the Trust Term
- Unitholders receive income distributions (dividends/interest)
- Portfolio generally unchanged
- Securities may be sold only in limited situations:
- Issuer bankruptcy
- Significant credit deterioration
- Corporate merger or acquisition
At Termination
- Trust liquidates all securities
- Proceeds distributed to unitholders
- Investors receive cash (not securities)
Redemption and Secondary Market
Redemption
Investors can redeem units with the sponsor at:
- NAV minus any applicable fees
- Sponsors must maintain a secondary market
Secondary Market
Some UITs trade in a limited secondary market, but liquidity is typically lower than mutual funds.
When UITs Are Suitable
| Suitable For | Not Suitable For |
|---|---|
| Investors wanting a known, fixed portfolio | Investors wanting active management |
| Those seeking monthly income (bond UITs) | Those who need high liquidity |
| Buy-and-hold investors | Frequent traders |
| Tax-conscious investors (lower turnover) | Those wanting dividend reinvestment |
Series Structure
To meet ongoing demand, sponsors create series of popular UITs:
- Each series is a separate trust
- Similar investment strategy
- Different start and termination dates
- Allows continuous availability
Exam Tip: Remember "Fixed and Finite" — UITs have a fixed portfolio and a finite (specific) termination date. This distinguishes them from mutual funds.
Which of the following is a key characteristic that distinguishes a UIT from a mutual fund?
A UIT does NOT have which of the following?
What typically happens to a UIT when it reaches its termination date?
2.8 Exchange-Traded Funds (ETFs)
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