Unit investment trust

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For the UK fund types, see Unit trust and Investment trust.

In U.S. financial law, a unit investment trust (UIT) is an exchange-traded mutual fund offering a fixed (unmanaged) portfolio of securities having a definite life. A UIT is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 and is classified as an investment company.^[1] UITs are assembled by a sponsor and sold through stockbrokers to investors.^[2]

Types

A UIT portfolio may contain one of several different types of securities. The two main types are stock (equity) trusts and bond (fixed-income) trusts.

Unlike a mutual fund, a UIT is created for a specific length of time and is a fixed portfolio, meaning that the UIT’s securities will not be sold or new ones bought, except in certain limited situations (for instance, when a company is filing for bankruptcy or the sale is required due to a merger).

Stock trusts

Stock trusts are generally designed to provide capital appreciation and/or dividend income. They usually issue as many units (shares) as necessary for a set period of time before their primary offering period closes. Equity trusts have a set termination date, on which the trust liquidates and distributes its net asset value as proceeds to the unitholders. (The unitholders may then have special options for the reinvestment of this principal.)

Bond trusts

Is a trust on bond

Legal status and documents

A UIT may be constituted as either a regulated investment company (RIC) or a grantor trust. A RIC is a trust, corporation or partnership in which investors have common investment and voting rights but do not have direct interest in investments of the investment company or fund. A grantor trust, in contrast, grants investors proportional ownership in the underlying securities.

A UIT is created by a document called the Trust Indenture. This document is drafted by the Sponsor of the fund, and names the Trustee and the Evaluator. By US law, the Sponsor and the Trustee may not be the same. The sponsor selects and assembles the securities to be included in the fund. The trustee keeps the securities, maintains unitholder records, and performs all accounting and tax reporting for the portfolio. The largest issuer of UITs is First Trust Portfolios. Other sponsors include SmartTrust, Van Kampen Investments, Millington Securities, Advisors Asset Management, Inc.^[3] and Guggenheim Funds. Most large brokerage firms (such as Merrill Lynch and A. G. Edwards) sell UITs created by these sponsors.

Tax perspective

From a tax perspective, UIT's offer a shelter from the unrealized capital gains taxes typical inside of a mutual fund. Because individual UIT's are assembled and purchased for specific periods of time, the cost basis consists of the initial purchase price of the securities held in the trust. A mutual fund on the other hand, taxes the individual based on the entire previous tax year regardless of the date purchased. An investor could, for example, purchase a mutual fund in October, absorb a loss during the last quarter of the year, and yet still be taxed on capital gains within the fund depending on the overall performance of the underlying securities from January 1 of the current year. A UIT avoids this potential tax consequence by assembling an entirely new "investment" for each individual investor.

Some exchange-traded funds (ETFs) are technically classified as UITs: however, ETFs usually do not have set portfolios (they are either managed or update automatically to follow an index), and can have lifetimes of over 100 years. For example, the SPDR S&P 500 Trust is scheduled to terminate January 21, 2118,^[4] and the PowerShares QQQ Trust is scheduled to terminate March 4, 2124.^[5]

References

↑ John Downes and Jordan Elliot Goodman (2003). Barron's finance & investment handbook (6th ed.). Barron's Educational Series. p. 927. ISBN 978-0-7641-5554-3.
↑ Darren W. Oglesby (2006). Concise encyclopedia of investing. Psychology Press. p. 76. ISBN 978-0-7890-2344-5.
↑ Advisors Asset Management, Inc. (2008, June 16). Advisors Asset Management and Fixed Income Securities Unite Under AAM Brand [Press release]. Retrieved from http://findarticles.com/p/articles/mi_m0EIN/is_2008_June_16/ai_n27501020/
↑ https://www.spdrs.com/library-content/public/SPY%20Prospectus.pdf
↑ http://www.invescopowershares.com/pdf/P-QQQQ-PRO-1.pdf

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