Unit investment trusts

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A unit investment trust, commonly referred to as a "UIT," is one of three basic types of U.S. investment companies. The other two types are mutual funds and closed-end funds.[1] UITs invest in stocks, taxable bonds, and municipal bonds. UITs are sold,with commissions, by brokerages.

Size of market

Of the four investment company structures based on the 1940 Investment Company Act (mutual funds, exchange traded funds, closed end funds, UITs) UITs have the least number of assets under management. [notes 1] The number of UITs and the cumulative assets under management are documented by the Investment Company Institute in the table below:

U.S. Unit Investment Trusts Assets 12/31/2014 [2]
UIT Number of Trusts Assets
Equity UITs 2,503 $85.96 billion dollars
Taxable Bond UITs 591 $3.06 billion dollars
Municipal Bond UITs 2,287 $12.11 billion dollars
Total UITs 5,381 $101.14 billion dollars

Characteristics of UITs

UITs are regulated primarily under the Investment Company Act of 1940 and the rules adopted under that Act, in particular Section 4[3] and Section 26.[4]

  • A UIT typically issues redeemable securities (or "units"), like a mutual fund, which means that the UIT will buy back an investor’s "units," at the investor’s request, at their approximate net asset value (or NAV). [5] Some exchange-traded funds (ETFs) are structured as UITs. Under SEC exemptive orders, shares of ETFs are only redeemable in very large blocks (blocks of 50,000 shares, for example) and are traded on a secondary market.
  • A UIT typically will make a one-time "public offering" of only a specific, fixed number of units (like closed-end funds). Many UIT sponsors, however, will maintain a secondary market, which allows owners of UIT units to sell them back to the sponsors and allows other investors to buy UIT units from the sponsors.[5]
  • A UIT will have a termination date (a date when the UIT will terminate and dissolve) that is established when the UIT is created (although some may terminate more than fifty years after they are 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.[5]
  • A UIT does not actively trade its investment portfolio. That is, 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.[5]
  • A UIT does not have a board of directors, corporate officers, or an investment adviser to render advice during the life of the trust.[5]

Types of UITs

UITs are usually categorized as either fixed income UITs or equity UITs. The typical minimum investment for a UIT is $1,000, with lower minimums usually granted for IRA accounts. Most fixed income UITs provide for dividend and principal distribution to a separate similar mutual fund. Many equity UITs allow for dividend reinvestment into the UIT.

Fixed income UITs

Fixed income UITs can be subdivided into the following types:

Fixed Income Unit Investment Trusts

Key features of fixed income UITs include the following:

  • The termination date of a fixed income UIT will be determined by the maturity date of the longest term bond held in the trust.
  • The monthly dividend income of a UIT will remain fixed until bonds are removed from the portfolio. Removal occurs when a bond matures; when a bond is called; or, in a worst case scenario, a bond defaults. Investors receive the principal distribution of a matured or called bond, and the UIT will subsequently provide lower income from the reduced number of bonds remaining in the trust.
  • Fixed income UITs are advertised on yield. Investors must closely examine the bond portfolio since current yield can be enhanced by a UIT holding lower quality bonds, callable bonds, or premium bonds. [6]

Equity UITs

  • Equity UITs are portfolios of preselected domestic and/or international stocks. Some equity UITs invest in specific sectors of the US market; some have a value or growth strategy; some may even hold the S&P 500 index stocks. [7]

Costs

Unit Investment Trusts have the following costs:

  1. Commissions. UITs are sold by brokerages, and usually have a front-end sales charge, which may be reduced by breakpoints for larger investments. There may also be a deferred sales charge. An additional charge, known as the creation and development fee (C&D), covers the costs of organizing the trust.
  2. Annual Fees. UITs pay an annual fee to cover administrative, bookkeeping, and trustee expenses. There are no investment management fees, since the trust is not managed.

Cost Example:

A typical transactional sales charge for UITs issued by First Trust, the largest issuer of UITs, includes the following expenses for the GNMA UIT: [8]

Transaction Charges
Type of Charge Expense
Initial Load 1.10%
Deferred Load 2.37%
C&D Fee 0.48%
Maximum Sales Charge 3.95%

The following breakpoints offer reduced maximum sales charges:

Breakpoints
Investment Maximum Sales Charge
$50,000 but less than $100,000 3.70%
$100,000 but less than $250,000 3.45%
$250,000 but less than $500,000 3.10%
$500,000 but less than $1,000,000 2.95%
$1,000,000 or more 2.45%

The prospectus [9] provides the following annual expenses for the UIT:

Annual Expenses
Expense Ratio
Portfolio supervision, bookkeeping, administrative, evaluation and FTPS Unit servicing fees 0.059%
Trustee’s fee and other operating expense 0.190%
Total 0.249%

Caveats

The Bond Book, Annette Thau (2001)

While Unit investment trusts provide investors with a diversified portfolio of assets, investors should consider the following features of the UIT market place.

  • Performance measurement. Whereas mutual funds, closed end funds, and exchange traded funds all have widely available public performance data that is tracked, evaluated and benchmarked by such firms as Morningstar and Lipper, there is no such publicly available performance measurement for unit investment trusts. [10]
  • Costs. The modest annual expense costs of unit investment trusts are offset by the 3% - 5% commission load expense. Low cost mutual fund and exchange traded funds are widely available to investors without the high commission costs. Treasury securities can be directly bought at auction with no transaction or subsequent investment management costs.

Annette Thau, author of The Bond Book advises asking the following questions before buying a fixed income UIT:

  • What securities does the UIT hold?
  • What is the maturity of the portfolio?
  • What is the credit quality of the portfolio?
  • If the portfolio is quoting a relatively high yield, are many of the bonds premium bonds? How likely is it that the bonds will be called?
  • What is the size of the commission?
  • To whom could I resell the UIT if I need to sell before the UIT matures?
  • Do you the seller, stand ready to buy back the UIT? At what price? [11]

Notes

  1. ICI 2014 Factbook. 2013 year end assets under management for each structure:
    • Mutual Funds: $15,018 billion dollars
    • Exchange Traded Funds: $1,675 billion dollars
    • Closed End Funds: $580 billion dollars
    • UITs: $87 billion dollars

See also

References

External links

Unit Investment Trust issuers

Bibliography