Unit Investment Trust

The UITs are registered investment companies that sell shares from an investment portfolio relatively formed and that consists on bonds and stocks. UITs have a fixed due date time in which investments or have matured or are liquidated.

Incomes are given back to shareholders. Consequently these trusts go well with bonds with their huge amount of incomes and the maturity of principal. With UIT stocks, stocks are sold on due date and incomes are given back to the unit holders (shareholders). A great part of what is sold by UITs is made up of free of tax municipal bonds followed by taxable-bond trusts and equity (stock) trusts.

UITs are bought through brokers that promote their own trusts and also through brokerage firms that represent trusts. If you do not want to keep a trust until maturity you can sell it back to the trust promoter. Trust promoters are required by law to buy them back at its Net  Asset value (NAV) which  can be larger or smaller than the amount the investor originally paid. Under certain circumstances shares of these trusts can be very much insolvent particularly bond trusts when interest rates are high.

Same warnings are applied to buy the initial public offerings (IPOs) of UITs as for closed-end funds:

  • Investors do not know the composition of investment portfolios
  • Investors pay fees for sales or loads that can be up to 4% or 5% higher than the NAV.

In a UIT, investment portfolio do not change after being bought. In other words no new security is bought or sold. Then theoretically speaking management fees should be lower in UITs than in closed-end funds because portfolios are practically kept without management. The only time in which securities are sold in a UIT is generally when a severe turndown has occurred in issuance. As a result , fees for lack of management should be included in a UIT. In the majority of instances this is not the case and fees can be high.