Unit Investment Trust
What is a Unit Investment Trust?
A Unit Investment Trust (UIT) is a specialized investment company that purchases a fixed portfolio of stocks, bonds or other securities. Investors purchase units of the trust, which represent an undivided ownership in the entire portfolio. UITs have stated maturities that range from one year to as many as thirty years, depending on the type of holdings that are in the portfolio. Trusts are designed to fill a variety of investment needs and risk tolerance levels. They fall primarily into two categories, equity and fixed income.
Equity UITs
Equity Trusts are typically classified as strategies, sectors or indexes.
Strategy Trusts follow predetermined investment criteria for selecting the stocks for the portfolio. Consistency and reliability are essential to strategy investing.
All strategies must have three inherent qualities:
- Simplicity: The strategies seek to outperform specified indices by selecting portfolios using sound, fundamental screens that reflect the historical behavior of the securities.
- Resilience: The strategies must show back-tested results and have staying power even through bear markets.
- Discipline: The strategies dictate which stocks are chosen for the portfolio. No emotional judgments are made, and the strategies remain the same.
Sector Trusts are another major type of Equity Trust. These portfolios are primarily composed of companies involved in a specific industry such as pharmaceuticals, energy, technology or financial services. Sector portfolios seek to provide capital appreciation by identifying market trends in specific areas and investing in the companies that are positioned to benefit from those trends.
Index Trusts attempt to mirror the performance of a specific market index. Indexing may provide growth potential and may stand as a companion investment for diversification and capital appreciation potential.
Fixed Income UITs
Fixed Income Trusts include portfolios that consist of corporate bonds, preferred securities, state and national municipal bonds, government securities, or mortgage-backed securities. Because the bonds are held in a Trust, investors know exactly what they are buying, the stated maturity date, the quality ratings, and the call dates for each of the bonds. Another important factor is the distribution of income. With a Trust, investors can receive either monthly or semi-annual income.
Corporate Bond Trusts hold bonds issued by corporations. They seek a high level of income coupled with low risk. As an added degree of safety, some of these Trusts may be privately insured to guarantee timely payment of interest and principal on the bonds in the Trust. Uninsured corporate bond Trusts usually reduce risk by investing only in high-quality (investment grade) bonds.
Preferred Securities Trusts hold preferred stock and trust preferred securities issued by corporations. They offer investors steady income with a yield advantage over common stocks and other fixed income investments. Because of this, preferred securities offer less capital appreciation potential than common stocks but are generally less volatile making them appealing to conservative investors.
National Municipal Bond Trusts hold bonds issued by states and municipalities to finance schools, highways, hospitals, airports, bridges, and other public projects. In most cases, income earned on these securities is not taxed by the federal government (although it may be taxed under state and local laws), making municipal bonds an attractive investment for higher income taxpayers. For some taxpayers, portions of income earned on these securities may be subject to the federal alternative minimum tax.
State Municipal Bond Trusts work just like national municipal bond trusts, except their portfolios contain issues of only one state. A resident of that state has the advantage of receiving income free of both federal and state personal income tax, and, in some cases, local and other tax. Again, for some taxpayers, portions of income may be subject to federal alternative minimum tax.
U.S. Government Securities Trusts seek to provide income with a minimum level of risk by holding a variety of government securities, such as U.S. Treasury bonds and other government securities, considered among the safest of bond investments.
Features and Benefits
- Known Portfolio: UITs provide a specific portfolio giving investors the comfort of knowing what they own.
- Diversification: By buying a variety of bonds or stocks, an UIT diversifies its holdings. A diversified portfolio helps reduce risk by offsetting losses from some securities with gains in others. The average investor would find it expensive and difficult to construct a portfolio as diversified as that of a UIT.
- Low Expenses: Traditionally, UITs have offered significantly lower expenses than other packaged products.
- Daily Liquidity: Units may be redeemed on any business day at the redemption price, which may be more or less than your original purchase price. There is no cost to liquidate.
- Professional Portfolio Selection and Supervision: There is a team of experienced, knowledgeable professionals who know and understand the markets to research and select appropriate securities for each portfolio. Once the portfolio is chosen, the holdings of the portfolio are supervised, eliminating the need to oversee each security on your own.
- Fully Invested in the Market: UITs have limited cash positions, so more of your money is working in the market.
- Ease of Ownership: With one low minimum purchase, investors can own a diversified portfolio of securities without making a substantial commitment of time or capital.
