Unit Investment Trusts
We offer a wide range of unit investment trusts (UITs). UITs are a type of investment company that pools investors’ money in a portfolio of securities. The investors own shares or units of the portfolio of securities. UITs share certain features with mutual funds, closed-end funds, and ETFs. These products all enable investors to buy a diversified basket of securities representing a particular asset class in a convenient package. UITs offer an opportunity for investors to own a portfolio of securities via a low-minimum-investment, typically liquid investment. As a point of contrast, while many actively managed mutual funds continually buy and sell securities, thereby changing their investment mix, the securities held in a UIT generally remain fixed. Please note that UITs are offered by prospectus; investors should read the prospectus carefully before investing. While it is not common, a trust may terminate early as described in the prospectus.
The key distinguishing features of UITs are a fixed portfolio and a defined, limited life. Like the other investment fund types listed above, UITs publish a net asset value (NAV) for their shares/units every day. Like mutual fund shares, the UIT units can be liquidated on any market day at the current NAV. Unlike mutual funds and ETFs that are open-ended, meaning more shares can be created as needed, both closed-end funds and UITs are closed to new share creation after the fund’s initial offering. The portfolios held by individual mutual funds, closed-end funds, and ETFs can change over time as a result of active portfolio management or changes in the stock weightings of a benchmark index. The portfolios held by UITs are fixed at the time of their creation. Investment committees, in designing a UIT portfolio, will define a basket of securities based on the UIT’s investing objective and strategy. Typically, the term of a UIT will be two years, though UITs with terms ranging from one year to five years also exist. Equity UITs typically have a set maturity or termination date while some fixed income UITs will not terminate until the final position matures or is called.
Unit Investment Trusts are generally long-term investment strategies and investors should consider their ability to invest in successive portfolios, if available.
At the UIT’s maturity, an investor typically has two options.
Option #1: Maturity Investors may do nothing and allow the portfolio units to mature. The trust will liquidate, and they will receive a cash distribution of the trust’s proceeds, if any. This would also constitute a taxable event.
Option #2: In-kind distribution Investors may generally request an in-kind distribution of the securities underlying the units if they own 2,500 or more units at either the time of purchase or maturity. Please see additional provisions set forth in the prospectus. In-kind distribution is generally available for stocks traded and held in the United States. In-kind distributions may be modified or discontinued by the trust at any time without notice. An in-kind distribution also constitutes a taxable event.
Fees and Costs
You will typically pay a sales charge when you buy units in a UIT’s initial offering, or a commission when you buy units in a UIT in a secondary trading market. You will pay this sales charge or commission in addition to the amount of the UIT you choose to buy.
- For example, if you invest $10,000 in a UIT’s initial offering that assesses a 2% sales charge, you will pay a $200 sales charge and the remaining $9,800 of your investment will be used to purchase units in the UIT’s initial offering.
- If you purchase $10,000 of units in a UIT in the secondary market (post initial offering), you will pay a 2% markup over the base price of the UIT unit. If the unit was offered at $10.50 in the secondary market you would pay $10.71 per unit and the difference of $0.21 per unit would be paid to BFE.
In some instances, collection of all or part of a sales charge is deferred over a period subsequent to the settlement date for the purchase of units. Typically, the deferred sales charge is deducted from the unitholder’s distributions on the units during the collection period until the total amount of the sales charge is paid.
Repeatedly selling UITs before their maturity date followed by the purchase of a newly issued UIT will cause you to incur sales charges with greater frequency.
UITs also deduct other fees and expenses from trust assets, such as organizational and operating expenses. These fees and expenses include portfolio supervision, recordkeeping, administrative fees, and trustee fees. UITs also charge creation and development fees, which compensate the sponsors for creating and developing the trusts. However, UITs generally do not deduct a separate management fee because the portfolio is not actively managed.
More information about UITs, including their sales charge and ongoing fees and expenses, is available in the UIT’s prospectus. You can request a copy of a UIT’s prospectus from your financial advisor. You can also find information about UITs on the SEC’s UIT Resource Page.