What is a Unit Investment Trust?

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Andrew Hayward

In the US, a unit investment trust (UIT) is an investment company that offers potential customers a fixed portfolio to invest in. This portfolio is made available to customers in a one-time public offering and generally consists of a fixed portfolio containing a mix of stocks, bonds, or other securities, aka “units,” which are sold to investors who receive a share of the principal and dividends (or interest).

A UIT can be a useful way for investors to pool resources and is an easy way of investing in a diversified portfolio of securities.

What are Unit Investment Trusts?

The products on offer in a UIT are carefully selected by professionals to meet a stated investment objective, be it growth, income, or capital appreciation. The exact nature and quantity of these securities will be listed in the respective UIT’s prospectus.

UITs employ a “buy-and-hold” investment strategy. This means that once the trust’s portfolio is selected, it will not be buying or selling any new ones. However, this may occasionally occur if questions arise regarding an issuer’s creditworthiness or similar concerns.

How Does a Unit Investment Trust Work?

The easiest way for investors to buy into a UIT is to ask their brokerage or investment firm about the availability and unit price of a UIT. Also, you can check Nasdaq’s Mutual Fund Quotation Service (www.nasdaq.com) for the price of some, but not all, available UITs.

A very limited number of units in a UIT are made available via an initial public offering, and these are usually snapped up straight away. However, many trust sponsors provide a secondary market in trust units (where outstanding units are repurchased from initial investors and subsequently resold to other investors). Thus, an investor may be able to purchase units in the secondary market.

Are Unit Investment Trusts a Good Investment?

A UIT is a great tool in helping to achieve long-term financial security. The professional nature of these products, coupled with their curated and carefully selected portfolio, make UITs an extremely attractive investment proposition.

UITs have a stated expiration date based on what investments are held in their portfolios. Once this date is reached and the portfolio terminates, investors will get a payout based on the value of the UIT’s net assets when it closes which is relative to their share.

What is the Difference Between a Unit Investment Trust and other investment companies?

A UIT is one of three basic types of investment companies. The other two types are open-end funds (usually mutual funds) and closed-end funds.

The main difference between these funds is that a UIT is a trust fund with a set number of shares and end dates. In contrast to this, a mutual fund is open-ended and actively managed, with shares being offered to the public, while a closed-end fund regularly engages in the buying and selling of securities in a portfolio, in marked contrast to the “buy-and-hold” strategy of a UIT. And, unlike open-end and closed-end funds, a UIT will not have a board of directors.

What is Net Asset Value (NAV)

Net asset value (NAV) refers to the value of an entity, calculated by taking the total value of the assets held within the entity and subtracting the total value of its liabilities. The NAV will represent the market value of a unit or share of a fund, much like the stock price of a company, in order to give you an idea of the fund’s value.

It should be mentioned, however, that in a UIT, the market price of a closed-end fund is based on investor demand and not as a calculation of net asset value.

What are Asset Classes?

Investment trusts will often specialize in a type of asset that they will hold within the trust. The two most common types of holdings within a UIT are:

  • Stocks
  • Bonds

However, a UIT is not limited to these types of holdings, and you may come across one which also contains assets such as mortgages, real estate investment trusts (REITs), master limited partnerships (MLPs), and even hybrid instruments, for example, preferred shares.

What are the Advantages of Investing in a Unit Investment Trust?

Due to the fact that within a unit investment trust, your money is invested in a variety of companies, investment trusts tend to offer a more stable investment environment. The other major advantage is that they offer a fully invested portfolio, which means that all money paid to the fund is invested into the fund. As such, every dollar you invest into the fund is working for you.

The other advantage of investing in an investment trust is that as an investor, you can rest easy thanks to their disciplined “buy-and-hold” strategy, which ensures that your fund is working with long-term gains in mind.

Also, UITs seek to provide the potential of a monthly income either from dividends or fixed-income distributions, although obviously this cannot be guaranteed as it is based entirely on earnings.

Are Unit Investment Trusts Safe?

While any type of investment comes with a degree of risk, a UIT is, generally speaking, considered a safe investment option. Of course, within UITs, a number of different products are available that will appeal to the risk appetites of a cross-section of investors. For example, a US Government Securities UIT is considered as one of the safest UITs to buy into, but this is offset by its relatively modest growth.

That said, it is still possible to lose money when investing in a unit investment trust. This is reliant on the performance of its holdings. If in any doubt, investors should seek investment advice from a financial advisor.

  • What is an Investment Trust UK
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