What it means
A UIT is built once. At the start, the sponsor selects a fixed list of securities, such as shares or bonds, places them in a trust and sells units to investors, and the list is largely unchanged until the trust ends.
That fixed termination date is a defining feature. Some trusts last a year or two, while others, such as those holding bonds, run for decades and pay back investors as the bonds mature.
Because there is no active trading, the costs are generally lower than for a managed fund, but investors usually pay an upfront sales charge, which is a percentage taken when units are bought. The trust is also required to publish its holdings, so investors know exactly what they own.
Units can usually be redeemed, meaning that investors can sell them back to the trust at the net asset value, which is the value of the portfolio per unit. Some trusts also have a secondary market where units can be traded.
A UIT differs from a mutual fund because the portfolio is not actively managed or rebalanced. If one of the holdings falls sharply, the trust will usually keep holding it, unless a pre-set rule says otherwise.
UITs are mainly a United States structure, and they are regulated under investment company law there. Anyone considering one should read the prospectus carefully for the objective, fees, holdings and end date.
In practice
Real-world examples.
Example
A retiree wants predictable income for the next ten years. She buys units in a UIT holding a fixed group of municipal bonds that mature over that period. She receives regular interest payments and gets her capital back as the bonds mature. She accepts that the amounts she receives are fixed by the portfolio and will not respond to later changes in interest rates.
Example
An investor likes the idea of owning twenty large dividend-paying companies without picking them himself. He buys units in a trust that holds exactly those twenty companies for two years. He knows the holdings in advance and expects little change. He also reads the prospectus to see how dividends will be paid out during the two years.
Example
A financial adviser recommends a UIT to a client who wants a defined end date because she needs the money for a house purchase in five years. The adviser explains that the portfolio will not be adjusted if markets change, so the value may fall as well as rise. She decides to put only part of her savings into the trust and keeps the rest in cash.
Formula
Calculation
Net asset value per unit = (total value of assets - liabilities) / number of units outstanding
A UIT holds securities worth $5,200,000 and has liabilities (accrued fees and expenses) of $200,000. There are 500,000 units outstanding.
Net asset value = 5,200,000 - 200,000 = $5,000,000.
NAV per unit = 5,000,000 / 500,000 = $10.00.
An investor holding 2,000 units has a stake worth 2,000 x 10.00 = $20,000. If the sales charge on purchase was 2.5% of the amount invested, the investor paid 20,000 / 0.975 = about $20,513 at the outset to end up with units worth $20,000, which shows the effect of the charge.Case study
Seen in the real world.
Stonebridge Sponsors is a fictional firm that creates unit investment trusts, and this is an illustrative case. It launched a two-year trust holding 15 large companies selected by a set rule, with units priced at $10 each and an upfront sales charge of 2%.
A small business owner, Dana, invested $50,000 and received units after the charge. Over the two years, 12 of the holdings rose and 3 fell, and the trust's value per unit moved from $9.80 after the charge to $11.20 at the end.
At the termination date, the trust sold its holdings and paid out the proceeds. Dana liked the clarity of a fixed plan, but she noted that one of the falling stocks had stayed in the portfolio the whole time. The illustrative case highlights both the transparency and the lack of flexibility. When the trust ended, she compared the final result against a simple index fund to judge whether the sales charge had been worthwhile.
Watch out
Common mistakes.
- Assuming the manager will respond to market changes. A UIT is not actively managed, and the portfolio mostly stays as it was set up.
- Ignoring the sales charge. It is taken at purchase and reduces the amount actually invested.
- Forgetting the end date. When the trust terminates, investors receive cash or may be offered a rollover into a new trust, and the timing may not suit the market.
Questions
People also ask.
How is a UIT different from a mutual fund?
A mutual fund is actively managed and is open-ended, while a UIT has a fixed portfolio and a fixed life.
Can I sell my units early?
Usually yes, at net asset value, though the price may be lower than what you paid if the portfolio has fallen.
Are UIT holdings disclosed?
Yes. The portfolio is published, so investors can see all the securities in the trust.
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