A unit investment trust UIT is one of three basic types of investment companies. The other two types are open-end funds (usually mutual funds) and closed-end funds. Exchange-traded funds (ETFs) are generally structured as open-end funds, but can also be structured as UITs.
A UIT invests the money raised from many investors in its one-time public offering in a generally fixed portfolio of stocks, bonds or other securities.
Here are some of the traditional and distinguishing characteristics of UITs:
- A UIT typically will make a one-time public offering of only a specific, fixed number of securities or units like a closed-end fund.
- A UIT typically issues redeemable units, like a mutual fund. This means that the UIT will buy back an investor’s units at their approximate net asset value (or NAV). Many UIT sponsors, however, will also maintain a secondary market, which allows investors to buy and sell UIT units at the market price.
- A UIT does not actively trade its investment portfolio. 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.
- A UIT will terminate and dissolve on a date that is specified at the time the UIT is 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 have a board of directors, corporate officers, or an investment adviser to render advice during the life of the trust.
- UITs themselves are registered with the SEC and subject to SEC regulation.
UITs hold a variety of securities. Each UIT may have different investment objectives, strategies, and investment portfolios. They also can be subject to different risks and fees and expenses. Fees reduce returns on fund investments and are an important factor that investors should consider when buying shares.
In addition, before investing in a UIT, you should carefully read all of the UIT’s available information, including its prospectus.