SPY is a Unit Investment Trust

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pkcrafter
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SPY is a Unit Investment Trust

Post by pkcrafter » Thu Jun 01, 2017 9:46 am

FYI

The ETF, SPY, is a UIT. Poster Triceratop mentioned it in this thread.

viewtopic.php?f=1&t=220119

I didn't know this and I wonder if others are aware of it. Triceratop cautions investors about using SPY in a taxable account because of the possibility of the trust being liquidated. I think that possibility is very low, but it does appear to be possible.

Here is information on the trust. Trust agreement begins on pg 77, and trust termination is on pg 78.

https://www.spdrs.com/library-content/p ... PECTUS.pdf


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Re: SPY is a Unit Investment Trust

Post by triceratop » Thu Jun 01, 2017 10:29 am

I didn't mean to fear monger, if this is not a significant concern. I was surprised to read that in the prospectus (what, not everybody reads the fine print?). Fortunately there should be time after the announcement of liquidation in which one could switch to e.g. IVV, VOO, etc, so that one does not have to be redeemed in cash and can stay invested. However, that does not help the tax issue.
Prior written notice of the termination of the Trust must be given at least twenty
(20) days before termination of the Trust to all Beneficial Owners. The notice must
set forth the date on which the Trust will be terminated, the period during which the
assets of the Trust will be liquidated, the date on which Beneficial Owners of Units
(whether in Creation Unit size aggregations or otherwise) will receive in cash the
NAV of the Units held, and the date upon which the books of the Trust shall be
closed. The notice shall further state that, as of the date thereof and thereafter, neither
requests to create additional Creation Units nor Portfolio Deposits will be accepted,
and that, as of the date thereof, the portfolio of stocks delivered upon redemption
shall be identical in composition and weighting to Portfolio Securities as of such date
rather than the stock portion of the Portfolio Deposit as in effect on the date request
for redemption is deemed received. Beneficial Owners of Creation Units may, in
advance of the Termination Date, redeem in kind directly from the Trust.
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Re: SPY is a Unit Investment Trust

Post by pkcrafter » Thu Jun 01, 2017 10:48 am

I've never owned SPY, but I was surprised to learn it is a UIT. Even an announcement 20 days prior to liquidation would cause an immediate massive sell off.


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Re: SPY is a Unit Investment Trust

Post by triceratop » Thu Jun 01, 2017 10:52 am

pkcrafter wrote:I've never owned SPY, but I was surprised to learn it is a UIT. Even an announcement 20 days prior to liquidation would cause an immediate massive sell off.


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Perhaps, but there may be institutional market makers with no tax liabilities happy to make a market for the taxable investors. Of course, I have no plan to take the risk of finding out what the spread to NAV would be..
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Re: SPY is a Unit Investment Trust

Post by mortfree » Thu Jun 01, 2017 10:57 am

Interesting. I've held SPY in my CapOne taxable account since 2004 or so.

Recently been thinking about selling it as I try to consolidate to my core funds in CapOne. Guess I can add this as a reason. I would just move the cash to my vanguard account and buy more VTI.

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Re: SPY is a Unit Investment Trust

Post by Tanelorn » Thu Jun 01, 2017 11:07 am

I don't think I can think of an ETF less likely to liquidate than SPY. There is absolutely nothing to worry about here - just lawyers being paid by the word to enumerate every possible risk for the SEC.

http://www.etf.com/sections/features-an ... nopaging=1
SPY is also the largest ETF in the market, boasting roughly $170 billion in assets under management. And it's the most liquid security in the world, trading some $27.4 billion on average every day.
And specifically with respect to termination:
The fund is actually a unit investment trust that has an expiration date: Jan. 22, 2118, or 20 years after the death of the last survivor of 11 people named in the Trust Agreement, the oldest of whom was born in 1990 and the youngest of whom was born in 1993, according to Kathleen Moriarty, the attorney who helped bring SPY to market—and countless other ETFs since.

That date can be extended. In fact, it already was once. When the fund first came to market, it was set to expire 25 years later, or January 2018—less than three years from now.
It's less likely to liquidate than most mutual funds and non-UIT ETFs too, lest you were thinking of buying something else to avoid this "problem".

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Re: SPY is a Unit Investment Trust

Post by triceratop » Thu Jun 01, 2017 11:11 am

Tanelorn wrote:I don't think I can think of an ETF less likely to liquidate than SPY. There is absolutely nothing to worry about here - just lawyers being paid by the word to enumerate every possible risk for the SEC.

http://www.etf.com/sections/features-an ... nopaging=1
SPY is also the largest ETF in the market, boasting roughly $170 billion in assets under management. And it's the most liquid security in the world, trading some $27.4 billion on average every day.
And specifically with respect to termination:
The fund is actually a unit investment trust that has an expiration date: Jan. 22, 2118, or 20 years after the death of the last survivor of 11 people named in the Trust Agreement, the oldest of whom was born in 1990 and the youngest of whom was born in 1993, according to Kathleen Moriarty, the attorney who helped bring SPY to market—and countless other ETFs since.

That date can be extended. In fact, it already was once. When the fund first came to market, it was set to expire 25 years later, or January 2018—less than three years from now.
It's less likely to liquidate than most mutual funds and non-UIT ETFs too, lest you were thinking of buying something else to avoid this "problem".
Do you know why the second condition for termination was added to the trust? And why it would be removed, given the initial interest in including it. I understand extending the lifetime of the trust given its popularity, but the death of 11 random individuals is...bizarre?
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: SPY is a Unit Investment Trust

Post by Tanelorn » Thu Jun 01, 2017 11:43 am

triceratop wrote:Do you know why the second condition for termination was added to the trust? And why it would be removed, given the initial interest in including it. I understand extending the lifetime of the trust given its popularity, but the death of 11 random individuals is...bizarre?
I don't, but maybe some trust or securities lawyer can stop by and enlighten us. I saw something similar happen to another "stock", which lasted for over a century and then folded up shop twenty years after the last person in the group died.

http://www.gniop.com/termination.html

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Re: SPY is a Unit Investment Trust

Post by lack_ey » Thu Jun 01, 2017 12:45 pm

I'd be more worried about the more immediate impact from not being able to reinvest dividends prior to payout or do securities lending, in addition to the higher ER compared to competing products.

By the way, some other older ETPs like SPDR S&P Midcap 400 ETF Trust (MDY), SPDR Dow Jones Industrial Average ETF Trust (DIA), and PowerShares QQQ Trust (QQQ) tracking the NASDAQ-100 are also structrured as UITs.

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Re: SPY is a Unit Investment Trust

Post by pkcrafter » Thu Jun 01, 2017 1:08 pm

or 20 years after the death of the last survivor of 11 people named in the Trust Agreement
Could be a case for Hercule Poirot.

I know, I know, it's gonna get locked, but I couldn't resist. I'll put my hands out for the cuffs and turn myself in.

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Re: SPY is a Unit Investment Trust

Post by Doc » Thu Jun 01, 2017 1:17 pm

triceratop wrote: Do you know why the second condition for termination was added to the trust? And why it would be removed, given the initial interest in including it. I understand extending the lifetime of the trust given its popularity, but the death of 11 random individuals is...bizarre
It's somekind of legal thing for organizations that are not corporations. The organization cannot stay in existence longer than the life of some named individual. The term "tontine" comes to mind as a related concept. Ask a lawyer for an opinion.

For an engineer it's "close enough" to a mutual fund to provide "an answer" to the problem.

I was aware of the UIT because of the long time between ex date and pay date. And I don't make a habit of studying a prospectus.
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Re: SPY is a Unit Investment Trust

Post by Theoretical » Thu Jun 01, 2017 1:23 pm

Tanelorn wrote:I don't think I can think of an ETF less likely to liquidate than SPY. There is absolutely nothing to worry about here - just lawyers being paid by the word to enumerate every possible risk for the SEC.

http://www.etf.com/sections/features-an ... nopaging=1
SPY is also the largest ETF in the market, boasting roughly $170 billion in assets under management. And it's the most liquid security in the world, trading some $27.4 billion on average every day.
And specifically with respect to termination:
The fund is actually a unit investment trust that has an expiration date: Jan. 22, 2118, or 20 years after the death of the last survivor of 11 people named in the Trust Agreement, the oldest of whom was born in 1990 and the youngest of whom was born in 1993, according to Kathleen Moriarty, the attorney who helped bring SPY to market—and countless other ETFs since.

That date can be extended. In fact, it already was once. When the fund first came to market, it was set to expire 25 years later, or January 2018—less than three years from now.
It's less likely to liquidate than most mutual funds and non-UIT ETFs too, lest you were thinking of buying something else to avoid this "problem".
It's the notorious troublemaker known as the Rule Against Perpetuities, https://en.wikipedia.org/wiki/Rule_against_perpetuities, a piece of English law that restricts trusts' (and any contingent property interest) length. One of the best sets of measuring lives to use for many trusts is "the then-living descendants of Queen Victoria."

The good news is that there are states in the US that have essentially abolished the RAP (such as South Dakota, Nevada, Delaware, and Wyoming, among others) and the trust can be re-sited there. I'm not sure what the tax consequences would be.

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Re: SPY is a Unit Investment Trust

Post by MarkRoulo » Thu Jun 01, 2017 1:30 pm

The ETF, SPY, is a UIT. ... Triceratop cautions investors about using SPY in a taxable account because of the possibility of the trust being liquidated. I think that possibility is very low, but it does appear to be possible.
Non-UIT ETFs can be liquidated, too, right?

PIMCO, for example, closed and liquidated two ETFs earlier this year: PIMCO Diversified Income Active ETF and PIMCO Global Advantage Inflation-Linked Bond Active ETF. What is different about a UIT liquidating?

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Re: SPY is a Unit Investment Trust

Post by Theoretical » Thu Jun 01, 2017 1:38 pm

The difference is that it's an involuntary liquidation based on external law.

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Re: SPY is a Unit Investment Trust

Post by triceratop » Thu Jun 01, 2017 1:39 pm

Doc wrote:
triceratop wrote: Do you know why the second condition for termination was added to the trust? And why it would be removed, given the initial interest in including it. I understand extending the lifetime of the trust given its popularity, but the death of 11 random individuals is...bizarre
It's somekind of legal thing for organizations that are not corporations. The organization cannot stay in existence longer than the life of some named individual. The term "tontine" comes to mind as a related concept. Ask a lawyer for an opinion.

For an engineer it's "close enough" to a mutual fund to provide "an answer" to the problem.

I was aware of the UIT because of the long time between ex date and pay date. And I don't make a habit of studying a prospectus.
I did ask a lawyer. Funnily enough Matt Levine (JD) also mentioned "tontine".

He linked to https://guan.dk/spy
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Re: SPY is a Unit Investment Trust

Post by MarkRoulo » Thu Jun 01, 2017 2:23 pm

Theoretical wrote:The difference is that it's an involuntary liquidation based on external law.
Can the SPY termination date not be extended? Or can it be, but we are worrying that it won't?

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Re: SPY is a Unit Investment Trust

Post by Theoretical » Thu Jun 01, 2017 2:36 pm

At least with Generation-skipping tax treatment, changing the term is often a taxable event. What's more likely is 1 of three things (1) that the trust gets "decanted" into a new trust with a near-infinite RAP, (2) lobbyists in the state where SPY is domiciled get the RAP repealed in the legislature, (3) some kind of reverse takeover by a 1940 fund gets orchestrated in such a way that it's not a taxable event.

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Re: SPY is a Unit Investment Trust

Post by TheTimeLord » Thu Jun 01, 2017 2:38 pm

triceratop wrote:I didn't mean to fear monger, if this is not a significant concern. I was surprised to read that in the prospectus (what, not everybody reads the fine print?). Fortunately there should be time after the announcement of liquidation in which one could switch to e.g. IVV, VOO, etc, so that one does not have to be redeemed in cash and can stay invested. However, that does not help the tax issue.
Prior written notice of the termination of the Trust must be given at least twenty
(20) days before termination of the Trust to all Beneficial Owners. The notice must
set forth the date on which the Trust will be terminated, the period during which the
assets of the Trust will be liquidated, the date on which Beneficial Owners of Units
(whether in Creation Unit size aggregations or otherwise) will receive in cash the
NAV of the Units held, and the date upon which the books of the Trust shall be
closed. The notice shall further state that, as of the date thereof and thereafter, neither
requests to create additional Creation Units nor Portfolio Deposits will be accepted,
and that, as of the date thereof, the portfolio of stocks delivered upon redemption
shall be identical in composition and weighting to Portfolio Securities as of such date
rather than the stock portion of the Portfolio Deposit as in effect on the date request
for redemption is deemed received. Beneficial Owners of Creation Units may, in
advance of the Termination Date, redeem in kind directly from the Trust.
Launched in 1993, SPDR S&P 500 ETF SPY was the first U.S.-listed ETF. It trades about $20 billion in shares on average each day, more than any other security. It also has the most-liquid options market of any ETF and tighter bid-ask spreads, all of which make this ETF ideal for institutional traders. Notably, SPY is organized as a unit investment trust rather than a regulated investment company like the other funds featured in this article. This structure prevents SPY from reinvesting dividends, holding securities that are not in the index, such as futures, or lending securities. It also has a one-month lag between the ex-dividend date and the payment of dividends. These factors have caused SPY to lag its index by more than its expense ratio, particularly in bull markets. And as the ETF market has grown, SPY’s liquidity advantage over competitors such as iShares Core S&P 500 IVV and VOO is slowly eroding.
http://www.morningstar.com/advisor/t/10 ... r-need.htm
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Re: SPY is a Unit Investment Trust

Post by Theoretical » Thu Jun 01, 2017 2:39 pm

Also, even if all 11 die in a Black Swan sort of way, the trust still has 20 years to unwind.

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Re: SPY is a Unit Investment Trust

Post by Doc » Thu Jun 01, 2017 2:49 pm

TheTimeLord wrote:http://www.morningstar.com/advisor/t/10 ... r-need.htm
Google "the-only-s-p-500-index-funds-you-will-ever-need"
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Re: SPY is a Unit Investment Trust

Post by LadyGeek » Thu Jun 01, 2017 4:13 pm

pkcrafter wrote:
or 20 years after the death of the last survivor of 11 people named in the Trust Agreement
Could be a case for Hercule Poirot.

I know, I know, it's gonna get locked, but I couldn't resist. I'll put my hands out for the cuffs and turn myself in.

Paul
A deposition for the case: Unit investment trusts

There's nothing specified on the manner of death. SPDR 500 Trust Prospectus:
The Trust is scheduled to terminate on the first to occur of (a) January 22, 2118 or (b) the date 20 years after the death of the last survivor of eleven persons named in the Trust Agreement, the oldest of whom was born in 1990 and the youngest of whom was born in 1993. Upon termination, the Trust may be liquidated and pro rata Units of the assets of the Trust, net of certain fees and expenses, distributed to holders of Units.
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Re: SPY is a Unit Investment Trust

Post by LadyGeek » Thu Jun 01, 2017 6:26 pm

Here's a helpful article: Unit Investment Trusts (UIT): An Introduction, from etfdb.com.
UITs are very similar products to ETFs, and only come with a few nuances that make them different. As far as ETFs that are structured at UITs, the only major factor that makes them different is their termination date, something that investors likely will not have to worry about. Though they are very similar to ETFs, investors should always read the prospectus of any fund structured as a UIT, as they can have unique details that may not be visible on the surface. As always, doing your homework will lead to sound investment decisions.
SPY is an example of why you need to read the Prospectus.
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Re: SPY is a Unit Investment Trust

Post by LazyNihilist » Fri Jun 02, 2017 2:43 pm

Why have it as the earlier date of the 2 options listed? Why not have it as the later date of the 2 options listed?
At least that would give some more certainty.
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Re: SPY is a Unit Investment Trust

Post by Theoretical » Fri Jun 02, 2017 3:26 pm

LazyNihilist wrote:Why have it as the earlier date of the 2 options listed? Why not have it as the later date of the 2 options listed?
At least that would give some more certainty.
It's a legal requirement for it to be written that way. If they didn't and enforcing the trust ever became an issue, the entire thing could be voided. It dates back to 1600s English law.

It sets a date almost certainly unreachable - 105 years plus 20 years for the 1993 baby. But if all 11 die, then the trust 20 year period starts thenceforth.

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Re: SPY is a Unit Investment Trust

Post by jbranx » Sat Jun 03, 2017 2:10 am

When Amex and Nate Most were trying to fashion the first ETF, the UIT structure for SPDR's was the one judged most likely to be understood and approved by the SEC. Kathleen Moriarity, known as the "spider lady" for her legal skills, drew up the legal framework and became the key legal talent for the growth of the nascent ETF business. Only real downside to SPY, formally the Standard&Poor's Depository Receipts, is that the manager cannot reinvest the dividends. They are held in cash and paid out, resulting in some slight drag compared to a regular ETF or index mutual fund when the 500 is rising anyway. State Street did SPY and still does. The second ETF out the gate at the old Amex was the S&P Midcap 400, by Bank of NY, and it became the prototype of how ETFs have since been done.

I've owned SPY since the debut in '93 and have not one smidgen of worry that it will ever be liquidated. It's the most traded entity in the equity universe.

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Re: SPY is a Unit Investment Trust

Post by LazyNihilist » Sun Jun 11, 2017 6:25 pm

Theoretical wrote:
LazyNihilist wrote:Why have it as the earlier date of the 2 options listed? Why not have it as the later date of the 2 options listed?
At least that would give some more certainty.
It's a legal requirement for it to be written that way. If they didn't and enforcing the trust ever became an issue, the entire thing could be voided. It dates back to 1600s English law.

It sets a date almost certainly unreachable - 105 years plus 20 years for the 1993 baby. But if all 11 die, then the trust 20 year period starts thenceforth.
When you say it is a legal requirement for it to be written that way, does it mean that they can't use the later of the two? I don't see the logic in why it can't be used. Or why did they have 20 years after rather than say, 120 years?
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Re: SPY is a Unit Investment Trust

Post by Theoretical » Sun Jun 11, 2017 6:47 pm

The rule is often stated as follows: “No interest is good unless it must vest, if at all, not later than twenty-one years after the death of some life in being at the creation of the interest.” In this context, the children are the absolute duration measures until January 22, 2097. At that point, if any are still alive, the trust will terminate on January 22, 2118 no matter how long the kids live.

https://en.wikipedia.org/wiki/Rule_against_perpetuities

There are decent odds a couple of the listed children will reach 104, but it is very unlikely any would reach 125 (if that's even possible for a human lifespan). For an investment prospectus, providing an absolute cutoff date that is slightly more conservative than is likely to apply gives investors a concrete period to fix on (likely an SEC requirement to put a date on because the RAP is stupidly complex).

It's a legal limitation that prevents the later of the two because the principle of the trusts was limiting the scope of restrictions on property from a long-dead ancestor. If the limitation was written as you propose (later of the two dates), the entire trust would be void as a matter of law.

Does it make much sense? NO
Is it a total pain in the [insert favorite word here] to deal with? YES
Does it trip up lawyers even now with complex trusts? YES

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