Unit Investment Trusts (UITs)
With some investments, the potential risks and rewards are not apparent on their face. A unit investment trust (UIT) is the perfect example of such an investment. The volatility of UITs is not apparent on the face of the investment, as some may be relatively low-risk investments meant for long-term holding, while others could be high-risk investments that can be bought and sold quickly.
What is a Unit Investment Trust?
A unit investment trust is an exchange-traded mutual fund offering a fixed portfolio of securities for a specified amount of time. A UIT is created when a sponsor selects a definite amount of securities to place into the portfolio, and determines how long the lifespan of the UIT will be. The lifespan of UITs can vary greatly. After the portfolio and lifespan are determined, there will then be an offering period where investors can purchase units of the UIT. Upon the termination of the trust, investors will receive the current fair market value of their units, which is determined by the performance of the securities within the trust.
Types of Unit Investment Trusts
Generally, there are two types of UITs: Equity UITs and Fixed Income UITs. It is the difference between these two types that makes it difficult to determine the risk involved with a UIT on its face.
Equity UITs, also known as stock trusts, are less common than Fixed Income UITs, with portfolios consisting of stocks. Like mutual funds, the performance of an Equity UIT is dependent upon the stocks in the portfolio. These trusts often provide monthly, quarterly, or semiannual payments based on the capital appreciation of the stocks, and/or any dividend income. Equity UITs tend to have more of a secondary market than Fixed Income UITs. That means that the investor can opt out of the trust at any given time by selling their units to another investor. Of course, if the stocks within the UIT are performing poorly then it may be difficult to find a buyer. For these reasons, Equity UITs are not considered to be long-term investments.
Fixed Income UITs, also known as bond trusts, are trusts whose portfolios consist of bonds. These UITs are far more common than Equity UITs. Fixed Income UITs often provide a relatively steady and predictable stream of income, which makes them sound long-term investments. Due to the fact that Fixed Income UITs are made up of bonds, they are not as volatile since their performance is not heavily reliant upon the performance of the market. Although these UITs do not have as much of secondary market, Fixed Income UITs can be sold back to the issuing investment company. However, the amount received by the investor at the time of sale may be less than the amount that would be received if the UIT was held until maturity.
Should I Invest in Unit Investment Trusts?There really isn’t a simple answer to this question. In either form, UITs can make great investments. Like any other investment, UITs do not shield the investor from risks associated with poor market conditions. The best way to gauge the risk and suitability of any UIT is to carefully examine the securities that make up the portfolio. If you’re looking for quick profits then an Equity UIT might be the right investment for you. On the other hand, if you’re a retiree seeking a more steady and secure stream of income, then a Fixed Income UIT might be the right investment.
PA & NJ Securities Litigation Law Firm
If you or someone you know has suffered financial injury as a result financial exploitation, broker misconduct, or investment fraud, please contact our team of experienced securities attorneys immediately for a free consultation at 1-855-462-3330 (toll-free) or by using our online contact form.
