Unit Investment
Trusts (UITs)
A "unit investment trust," commonly
referred to as a "UIT," is one of three
basic types of
investment
company. The other two types are
mutual funds
and
closed-end funds.
Here are some of the traditional and
distinguishing characteristics of UITs:
- 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)
. 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 that allows owners of UIT
units to sell them back to the sponsors
and allows other investors to buy UIT
units from the sponsors.
-
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.
-
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.
-
A UIT does
not have a board of directors, corporate
officers, or an investment adviser to
render advice during the life of the
trust.
Keep in mind that just because a UIT had
excellent performance last year does not
necessarily mean that it will duplicate that
performance. For example, market conditions
can change, and this year’s winning UIT
could be next year’s loser. That is why the
SEC requires funds to tell investors that a
fund’s past performance does not necessarily
predict future results. To understand the
factors you should consider before investing
in a mutual fund, read
Mutual Fund Investing: Look at More Than a
Mutual Fund's Past Performance. In
addition, before investing in a UIT, you
should carefully
read all of
the UIT’s available information,
including its prospectus.
UITs are regulated primarily under the
Investment Company Act of 1940 and the rules
adopted under that Act, in particular
Section 4 and
Section 26.
http://www.sec.gov/answers/uit.htm
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