Although unit investment trusts are not as well-known as mutual funds and exchange traded funds, UITs may have a place in your investment portfolio as an alternate type of investment product. With a unit trust, an investor is buying into an investment product with a fixed portfolio and a fixed term or maturity date.
Unit Trust Features
Mutual funds, closed-end funds, ETFs and unit investment trusts are different types of investment companies that sell units or shares to investors. What sets unit trusts apart is that all UITs have a fixed term. When the units are first sold, a termination date is set; on that date the trust is liquidated and proceeds distributed to unit holders. The termination date may be one year to 20 years in the future. When new units are sold, the trust has all the stocks or bonds it will own, and those securities are held until the termination date. With a unit trust, an investor knows the portfolio composition of what he is buying and how long the units will be owned.
Types of Investment
Unit trust sponsors offer both bond, or fixed income, and stock, or equity, trusts. However, most money goes into fixed income bond UITs. The fixed starting and ending dates of a unit trust are well matched to a portfolio of bonds with maturities at or near the trust end date. Unit trusts invest in both tax-free and taxable bonds. Investors in high-income-tax states can often invest in state-specific tax-free UITs. Equity trusts typically follow a specific investment or stock selection strategy and hold the selected stocks for several years.
Unit investment trusts offer several features that may benefit investors more than investing in individual securities, especially bonds. A UIT pays monthly dividends, which can be taken in cash or reinvested into more shares of the UIT, allowing the earnings to compound. The sponsor of a UIT will buy back units at the current net asset value -- NAV -- if an investor needs to cash out of the investment early. The set termination date of a bond UIT means that the sponsor can calculate an accurate expected yield from the investment, allowing investors to do long-term planning.
Buying Unit Investment Trusts
A unit investment trust can only be purchased through a licensed investment adviser or stock broker. Unit investment trusts include a sales charge or load built into the unit offer price. The amount of the sales charge is disclosed in the trust prospectus, which should be supplied by your investment rep. Units of a new trust are only offered once during an initial public offering. If you want to add to a UIT investment, your investment rep may be able to obtain additional shares from the trust sponsor, but a regular secondary market for UIT units doesn't exist.