Unit investment trust
UITs are registered investment companies that sell units (shares) of
a relatively fixed investment portfolio consisting of bonds or
stocks. UITs have a stated termination date when the investments
either mature or are liquidated. The proceeds are then returned to
the unit-holders (shareholders). Consequently, these trusts are well
suited to bonds, with their streams of income and maturity of principal.
With stock UITs, the stocks are sold at the termination date,
and the proceeds are returned to the unit-holders. The majority
of UITs sold consists of tax-exempt municipal bonds, followed by
taxable bond trusts and then equity (stock) trusts.
UITs are bought through brokers who sponsor their own
trusts and through brokerage firms that represent the trusts. If you
do not want to hold your trust through maturity, you can sell it
back to the sponsor of the trust. The trust sponsors are required by
law to buy the shares back at their NAVs, which can be more or less
than the amount the investor paid initially. Under certain conditions,
shares of these trusts can be quite illiquid, particularly for
bond trusts when interest rates are rising.
The same caveats apply for buying initial public offerings
(IPOs) of UITs as for closed-end funds:
* Investors do not know the composition of the portfolio’s
* Investors pay sales charges or loads, which may be as much
as 4 to 5 percent higher than the NAVs.
In a UIT, the portfolio of investments generally does not
change after purchase. In other words, no new securities are
bought or sold. Theoretically, therefore, management fees should
be lower on UITs than on closed-end funds because the portfolio
remains unmanaged. The only time securities are sold in a UIT is
generally when a severe decline in the quality of the issues occurs.
Consequently, no management fees should be incurred on a UIT. In
most instances this is not the case, and fees can be high.
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