2.7 Unit Investment Trusts (UITs)
Key Takeaways
UITs hold a fixed, unmanaged portfolio and have a specific termination date.
They issue a fixed number of units but allow investor redemption with the sponsor.
UITs have no board of directors and no management fees, but do have sales and trustee fees.
Equity UITs are shorter term; bond UITs can be longer term with monthly income.
At termination, the portfolio is liquidated and proceeds paid to unitholders.
Unit Investment Trusts (UITs) are a type of investment company that offers a fixed, unmanaged portfolio of securities with a specific termination date. They share characteristics with both mutual funds and closed-end funds.
What is a UIT?
A UIT is an investment company that:
- Holds a fixed portfolio of securities (no active management)
- Has a termination date when the trust dissolves
- Issues a fixed number of units (like closed-end funds)
- Offers redeemable units (like open-end funds)
- Has no board of directors
Key Characteristics
| Feature | UIT |
|---|---|
| Management | Unmanaged (passive) |
| Portfolio | Fixed at creation |
| Termination | Specific end date |
| Units Issued | Fixed number |
| Redemption | Redeemable with sponsor |
| Board of Directors | None |
Types of UITs
Equity UITs
- Hold stocks selected at trust creation
- Typically 15-24 month term
- Seek capital appreciation and/or dividend income
- At termination, proceeds distributed to unitholders
Bond UITs
- Hold fixed-income securities
- Longer terms (often 15-30 years)
- Pay monthly income
- As bonds mature/are called, principal returned to investors
- Popular for investors seeking predictable income
UIT vs. Mutual Fund Comparison
| Feature | UIT | Mutual Fund |
|---|---|---|
| Management Style | Unmanaged (fixed portfolio) | Actively or passively managed |
| Portfolio Changes | Generally none | Regular buying/selling |
| Termination Date | Yes (specific date) | No (perpetual) |
| Shares/Units | Fixed number | Unlimited |
| Board of Directors | No | Yes (at least 40% independent) |
| Management Fee | None | Yes |
| Dividend Reinvestment | Usually not available | Typically available |
UIT Fees and Expenses
UITs do not charge management fees (since there's no active management), but they do have:
| Fee Type | Description |
|---|---|
| Sales Charge | Front-end load, typically 1-5% |
| Creation & Development (C&D) Fee | One-time fee at creation |
| Trustee Fee | Annual fee for trust administration |
| Operating Expenses | Annual portfolio expenses |
How UITs Work
Creation
- Sponsor selects securities for the portfolio
- Trust is created with specific termination date
- Units are offered to investors
- Portfolio remains fixed (with limited exceptions)
During the Trust Term
- Unitholders receive income distributions (dividends/interest)
- Portfolio generally unchanged
- Securities may be sold only in limited situations:
- Issuer bankruptcy
- Significant credit deterioration
- Corporate merger or acquisition
At Termination
- Trust liquidates all securities
- Proceeds distributed to unitholders
- Investors receive cash (not securities)
Redemption and Secondary Market
Redemption
Investors can redeem units with the sponsor at:
- NAV minus any applicable fees
- Sponsors must maintain a secondary market
Secondary Market
Some UITs trade in a limited secondary market, but liquidity is typically lower than mutual funds.
When UITs Are Suitable
| Suitable For | Not Suitable For |
|---|---|
| Investors wanting a known, fixed portfolio | Investors wanting active management |
| Those seeking monthly income (bond UITs) | Those who need high liquidity |
| Buy-and-hold investors | Frequent traders |
| Tax-conscious investors (lower turnover) | Those wanting dividend reinvestment |
Series Structure
To meet ongoing demand, sponsors create series of popular UITs:
- Each series is a separate trust
- Similar investment strategy
- Different start and termination dates
- Allows continuous availability
Exam Tip: Remember "Fixed and Finite" — UITs have a fixed portfolio and a finite (specific) termination date. This distinguishes them from mutual funds.
Which of the following is a key characteristic that distinguishes a UIT from a mutual fund?
UITs are not registered with the SEC
UITs have a fixed, unmanaged portfolio with a termination date
UITs charge higher management fees
UITs cannot be redeemed by investors
A UIT does NOT have which of the following?
A prospectus
A board of directors
A termination date
Redeemable units
What typically happens to a UIT when it reaches its termination date?
It converts to a mutual fund
The portfolio is liquidated and proceeds distributed to unitholders
Units continue trading indefinitely
The trust automatically renews for another term
Sections you finish are checked off in the contents.