Unit Investment Trusts (UITs)

Table of Contents

Unit investment trusts ( UITs ) are fixed portfolios of a particular asset class that were created to effect some particular investment strategy in a limited timeframe that ends on the maturity date for the fund. The trust indenture is the legal agreement specifying the terms of the trust and the obligations of the trust sponsor, who creates the trust, and the investors of the trust, who are the trust beneficiaries. Like closed-end mutual funds, UITs are registered under the Investment Company Act of 1940, but their holdings are fixed and cannot be changed. Shares of UITs are often called units and the shareholders are unitholders. Units are issued as redeemable shares, meaning that the trust redeems the shares from investors, then sells them to other investors through a secondary market. However, unlike open-end mutual funds, there is no option to reinvest dividends. A UIT may be structured either as a regulated investment company ( RIC ) or as a grantor trust. Investors in RIC’s have voting rights but not a direct interest in the trust investments, whereas a grantor trust gives the unitholders a proportional interest in the underlying securities.

A unique feature of a UIT is that it is self-liquidating: the trust terminates at a predetermined date based on the trust assets, usually 15 or 24 months. So UITs have a maturity date. In a bond fund, the maturity date is the date the bonds mature. Equity UITs have a specified maturity date that is determined by the strategy being pursued. For instance, some UITs use the Dogs of the Dow strategy, which is to buy the highest yielding stocks of the Dow Jones Industrial Average, hold them for 1 year, then sell them to buy the stocks with the current highest yield, which involves rolling 1 UIT into another.

When a UIT is liquidated, the investor has 3 choices:

reinvest the proceeds into another trust at a reduced sales charge from the same sponsor
receive a cash distribution
receive an income distribution of the securities in the trust, but only investors with at least 2500 units can do this.

UITs have several main types: equity trusts and bond trusts, subdividable into taxable trusts, consisting of corporate bonds and tax-exempt trusts consisting of municipal bonds. Equity trusts can also be further subdivided into domestic and international or global trusts, holding such high-yielding assets as dividend-paying common stocks, preferred stocks, real estate investment trusts, or master limited partnerships. UITs can also be segmented into categories: asset allocation, sector, target strategies, and “theme” portfolios. Equity trust assets far exceed those of bond trusts.

Some UITs invest in a particular class of securities, such as blue chips, REITs, or utilities. Sometimes the securities are screened from a particular index in the hopes of outperforming the index. Some UITs have specialized holdings, such as companies that are likely to be acquired, or that focus on renewable energy, or they might hold a particular type of security, such as preferred stock.

UIT price quotes can only be obtained from the broker, or for listed UITs, an investor can use the Nasdaq Fund Network (NFN). UIT units can be redeemed by the trust sponsor at the current net asset value (NAV) without any additional fees or commissions. Like CEFs, UITs do not need to redeem shares to maintain liquidity.

The disadvantages of unit investment trusts are the high fees. UITs are usually sold by brokerages, which charge a commission. There is often a front load and a back load, as well as ongoing management fees. Some UITs also charge 12b-1 fees to market their shares.

A typical UIT charges several fees:

Sales charges, both initial and deferred are charged. An initial sales charge is paid at the time of purchase while deferred sales charges are paid monthly from the trust assets. Note, however, that the entire deferred sales charge may be assessed even if the units are redeemed early.
Annual trust operating expenses are assessed to pay for portfolio supervision, administration, and various other operating expenses.
Creation and development fees, which is the dollar charge per unit, are collected at the end of the initial public offering and can be as much as 1% of the IPO.

However, annual UIT expenses are low, often 0.25% to 0.3% of assets since a UIT does not trade securities, so few, if any, transaction costs. As with mutual funds, sales charges can be less if the investor buys at least a certain minimum of units.

Another disadvantage results from the fact that a UIT is a passively managed fund. Because the UIT portfolio is fixed, changes in the market may cause UIT income to decline since the fund manager cannot easily remove declining assets, which is a primary reason why the terms of most UITs does not exceed 2 years. Many UITs also try to minimize the disadvantage of a fixed portfolio by fully replicating an index. Moreover, because the number of units are fixed, it may not be possible to buy the number of desired units. Other disadvantages may be specific to the type of securities held by the trust. Example: most corporate bonds have call provisions, so income from a UIT that holds corporate bonds may decline over its term as some of its bonds are called by the issuer.

UITs also have no performance history since their average term is 15 months to 2 years. With the funds’ short lifespans, the funds’ issuers frequently use back tests to substitute for actual performance history, which uses historical data to arrive at a performance value. Thus, the issuers argue that if the UIT had existed in the past, this is how it would have performed. But this yardstick is misleading: as oft been said with investment strategies, the past is no indicator of future performance, and, often, the composition of the UIT is selected to show a high performance record. Even the beginning and end dates for the historical record are selected to maximize the historical gains.

Due to these disadvantages, UITs have declined, especially since index funds and exchange-traded funds can accomplish the same investment objectives, but with lower expenses.

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Investment Trust

An investment trust is a financial entity that receives funds from investors or shareholders and invests in different portfolios on their behalf. It makes a limited number of shares available for trade, given the market’s demand and supply of investment securities.

Investment Trust

Investing in these trusts helps investors deal in less risky trades by providing them an opportunity to enjoy a diversified portfolio. In addition, investment in diverse profiles enables them to gain from one, even if there is a loss from another. In short, individuals and entities can maintain a balanced investor profile.

What Is An Investment Trust Fund?

Investment Trust Explained
Factors
Recommendations
Examples
Investment Trust vs Unit Trust
Frequently Asked Questions (FAQs)
Recommended Articles

An investment trust, a closed-end fund, is a publicly listed financial institution that invests in shares or financial assets on behalf of its investors or other organizations.
The value of the amount of money invested in it depends on the demand and supply of the invested share or financial asset and the underlying value of the owned assets.
It is the best option for an investor looking at profits with minimal risk since it allows investing in many shares rather than putting all of the investment into one company’s shares.
Although the risk of losing out on investment due to the performance of one share would not hurt the investor, they will be in a better position if they invest in other shares in the fund, which might have a better performance.

Investment Trust Explained

An investment trust is a closed-ended financial institution that pools the funds from shareholders and invests in diversified portfolios on their behalf. It differs from a unit investment or mutual fund, which offers diversified holdings in the form of units and not as shares. The demand and supply of the investment trust shares determine the outstanding shares to trade then.

The trust functions based on the market. Thus, the investment trust fund performs well if the market performs well. Therefore, the fund manager needs to be able to gauge market conditions and enter or exit a favorable or unfavorable position. As a result, it has an inherent risk of losing out on the investment if the right decisions are not made at the right time.

Factors

In theory, the returns from investing in a trust are humongous. However, the returns rely on the performance of the invested shares and assets and their market demand and supply.

Since they hold a fixed amount of shares and assets, the supply and demand of the invested shares and assets in the trust affect the value of the underlying assets.

Investment Trust Factors

The performance of the assets and shares in the investment trust majorly impacts the value of the money invested. However, since investors spend money on various assets and shares, the trust’s value remains stable in a short span.

Recommendations

The positive sides of these closed-ended funds are too clear for the investors to notice the associated challenges. However, they must understand and prepare to handle the same while collaborating with different types of these trading, be it unit investment trust or citizen investment trust.

To gain considerable returns from an investment, investors must lock out a substantial amount of time for which they invest the money. This tenure can extend up to a minimum of five years or more. Furthermore, they depend on the market and on the fund manager’s decisions, which might result in a loss of investment. Hence, the investor is left with no option other than to exit from the investment completely.

The profit and dividends gained from it are taxable. Therefore, they can reduce the actual returns gained from the investment.

Examples

Let us consider the following examples to understand how an investment trust works:

Example #1

Suppose one invests $1,000 in XYZ Trust. It pools the money from shareholders and other investments to purchase a diverse range of products, including shares, bonds financial assets.

This fund becomes the financial source for the fund manager to buy shares. Since investors invest in the open market, they buy and sell shares and assets per the market conditions. This ensures they seize the right opportunity to earn maximum profits from the invested shares and assets.

Investors, however, can sell the shares in the open market at the market price and generate profit from the investment. Therefore, the investment can increase or decrease depending on the invested shares and financial assets.

Example #2

Real estate investment trusts (REITs) are among the most fruitful investments, especially for starters. This is because significant portfolios do not lose value overnight. Hence, investors can consider being in a safe zone by investing in these trusts. For example, Claros Mortgage Trust has been declared one of the most beneficial trusts to invest in, in 2022. It offers commercial real estate loans to the most important cities in the United States. Hence, it becomes a safer investment option.

Investment Trust vs Unit Trust

For investors, unit trusts are one of the most common investment options. However, the trusts fit best into some purpose-driven financial planning due to their unique features. The two differ in multiple ways:

Category	Investment Trust	Unit Trust
Fund type	Closed-end fund with a set amount of funds to be raised.	Open-ended funds with no limit of cash to accept.
Fund size	Listed on the stock market for traders to buy shares	Fund size diminishes when the number of sellers exceeds the number of buyers
Best fit	For long-term	For short-term

Frequently Asked Questions (FAQs)

What is a collective investment trust?

It is a trust that takes care of the pooled trust accounts under the supervision of a bank or trust company. They use the grouped assets of specific criteria received from different entities and individuals to build diversified portfolios.

Are investment trusts closed-ended?

Yes, these trusts are closed-ended funds as they have a set limit of cash to be accepted by the investors. Therefore, they do not look for more money after a certain limit.

Why do investment trusts trade at a discount?

Unlike open-ended funds that are ready to accept as much cash from investors as possible, the investment trusts trade at a discounted value lower than their investment. However, sometimes, they may trade at a value more than the value of the investments, termed as premiums. While the former makes the share cheaper, the latter makes it expensive.

Author

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Samantha has a background in computer science and has been writing about emerging technologies for more than a decade. Her focus is on innovations in automotive software, connected cars, and AI-powered navigation systems.