Unit Investment Trust Fund--Definition
Unit investment trust funds, or UITs, are one of the four types of investment companies along with mutual funds, closed-end funds and exchange traded funds. Unit investment trusts can be appropriate investment products for buy-and-hold investors who are looking for a packaged investment product that follows a certain strategy or style.
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Function
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Unit investment trust units are sold at an initial offering to investors. Additional shares of a particular trust are only available for reinvestment of any interest or dividends paid by the trust. Investors can redeem their units for cash at the current net asset value with the issuing company. UITs also have a fixed termination date when all units will be redeemed and the trust will be dissolved.
Features
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A unit investment trust starts with a specific portfolio of securities and holds those securities until termination. The funds are not actively managed and securities are not bought or sold inside the trust. Investors in a UIT will know exactly what securities are in the trust from the day they buy it until the units are redeemed. The result is that a UIT is a diversified portfolio of selected securities that will not change for the life of the trust.
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Types
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UITs that hold taxable or tax-free municipal bonds are the most common type of fund. A bond UIT will own a portfolio of bonds all with the same maturity date. These UITs allow investors to diversify across different bond issuers and know in advance the amount of income they will receive and when the principal value will be returned. One advantage of UITs over direct bond ownership is the option to reinvest the distributions into more units, compounding the earnings. Stock UITs own shares of preferred or common stock. These UITs focus on a specific stock market strategy or sector with a fixed date of termination. Investors get a diversified portfolio without the requirement to analyze and select individual stocks. If the stocks in the trust pay dividends they can also be reinvested into more trust shares.
Potential
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Unit investment trust funds may be appropriate choices for investors with a financial goal at a specific time in the future, such as paying for college or retirement. Bond UITs have an advantage over bond funds with the fact that the UIT has a maturity date when the invested principal will be returned. UITs are a popular vehicle to invest in municipal bonds. Muni bonds can be difficult for individual investors to buy and more so to sell at a reasonable price. Muni bond UITs give investors an easy way to redeem share at their current value if it is necessary.
Dogs of the Dow
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A popular investment strategy, called the Dogs of the Dow, involves buying the 10 highest yielding of the Dow Jones Industrial Average stocks on January 1 and holding them for the full year, then repeating the process each year. The major stock brokerage firms all offer Dogs of the Dow UITs with a one-year redemption. Investors who want to follow this strategy can buy the UIT and have it rolled over to the new fund each year.
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