Unit Investment Trusts (UITs) & Real Estate Investment Trusts (REITs)

UITs and REITs are two types of pooled investment products that offer unique characteristics compared to mutual funds and ETFs. Understanding their structures, benefits, and limitations is important for the SIE exam.

Unit Investment Trusts (UITs)

A Unit Investment Trust (UIT) is a type of investment company that purchases a fixed portfolio of securities and holds them until a predetermined termination date.

Key UIT Characteristics

How UITs Work

1. Sponsor creates trust and selects securities
2. Fixed number of units issued to investors
3. Trust holds securities with little or no change
4. Income distributed to unit holders
5. Trust terminates on predetermined date
6. Assets sold and proceeds distributed

Types of UITs

UIT Redemption Options

Investors can:

• Hold to termination: Receive proportional share of liquidation proceeds
• Redeem early: Sell units back to sponsor at current NAV
• Sell in secondary market: Some sponsors maintain a market for units

UITs vs. Mutual Funds

Key Point: UITs have no investment adviser making decisions after creation. The "buy and hold" approach results in lower management fees but no flexibility.

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Real Estate Investment Trusts (REITs)

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs allow investors to invest in real estate without directly buying property.

REIT Requirements

To qualify as a REIT under the tax code:

Types of REITs

Equity REITs (Most Common)

• Own and operate commercial real estate
• Properties include: apartments, offices, retail, hotels, healthcare facilities
• Generate income from rent collection
• Can benefit from property appreciation
• Make up approximately 90% of REITs

Mortgage REITs (mREITs)

• Lend money to real estate owners
• Invest in mortgages or mortgage-backed securities
• Generate income from interest payments
• Do NOT benefit from property appreciation
• More sensitive to interest rate changes

REIT Tax Treatment

The conduit tax treatment (Subchapter M):

• REITs distribute 90% of taxable income → avoid corporate-level tax
• Dividends taxed as ordinary income to investors (not qualified dividends)
• Investors may also receive return of capital distributions

Important: REIT dividends are generally taxed as ordinary income, NOT at the lower qualified dividend rate.

REIT Advantages and Disadvantages

Traded vs. Non-Traded REITs

Warning: Non-traded and private REITs have significant liquidity risk—investors may not be able to sell when needed.

UITs vs. REITs Comparison

Key Takeaways

UITs:

• Fixed portfolio with no active management
• Terminate on a predetermined date
• Lower fees but no flexibility
• Redeemable with sponsor at NAV

REITs:

• Invest in real estate properties or mortgages
• Must distribute 90% of income to maintain tax status
• Dividends taxed as ordinary income
• Provide real estate exposure with market liquidity