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stock market faqs
What Is A Unit Investment Trust?
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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