About Unit Trusts
According to the Securities and Exchange Commission, unit investment trusts are one of three types of investment companies along with mutual funds and closed-end funds. Unit trusts have their own unique features that make them different than the other fund types and appropriate for certain types of investment strategies.
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Unit Trust Characteristics
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The main characteristics of unit investment trusts---UITs---it that all units of a trust will be sold by the trust sponsor at one time and the trusts will have a fixed life or termination date. A unit trust will also hold the initial portfolio of securities until the termination date of the trust. UITs do not buy and sell securities for the trust portfolios after the units have been issued.
Unit Trust Characteristics
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Investors who buy unit trust shares are allowed to receive any dividends paid as a check or reinvest the distributions into more shares of the trust. The trust sponsor must buy back at the current net asset value any units and investor wants to sell, providing liquidity for investors. On the termination date of a trust, the securities will be sold and the proceeds distributed to the unit holders.
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Types of Unit Trusts
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The majority of unit trust assets are in UITs that hold a portfolio of municipal or taxable bonds. A unit investment trust can purchase a portfolio of bonds with maturity dates the same as the termination date of the trust. This ensures a specific payout amount to unit holders when the trust is closed out. A bond unit trust will pay a set dividend amount each month, providing a steady income to investors. Equity UITs hold a portfolio of stocks that match a certain index or specific investment strategy. On the termination date, the stocks are sold and the trust investors will realize the profit or loss from the stock portfolio performance.
Investment Considerations
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Unit investment trusts are only sold through brokers and investment representatives. A prospectus is issued describing the trust's portfolio holdings and expected returns. The initial price of trust units includes a commission for the selling broker. Bond UITs offer a convenient way to invest in a professionally chosen portfolio of bonds. UITs offer liquidity and regular income payments. Equity UITs are in competition with index mutual funds and exchange traded funds. There should be a compelling reason to pick a equity UIT over one of the other low cost options besides the broker's commission.
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