In U.S. financial law, a unit investment trust (UIT) is an investment product offering a fixed (unmanaged)

portfolio Portfolio may refer to: Objects * Portfolio (briefcase), a type of briefcase Collections * Portfolio (finance), a collection of assets held by an institution or a private individual * Artist's portfolio, a sample of an artist's work or a ...

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

having a definite life. Unlike open-end and closed-end investment companies, a UIT has no board of directors. A UIT is registered with the

Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...

under the Investment Company Act of 1940 and is classified as an

investment company An investment company is a financial institution principally engaged in holding, managing and investing securities. These companies in the United States are regulated by the U.S. Securities and Exchange Commission and must be registered under the ...

. UITs are assembled by a sponsor and sold through

brokerage firm A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...

s to investors.

Types

A UIT portfolio may contain one of several different types of securities. The two main types are

stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...

(equity) trusts and

bond Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Chemical bond, the attraction of atoms, ions or molecules to form chemica ...

(

fixed-income Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the pri ...

) trusts. Unlike a

mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...

, a UIT is created for a specific length of time and is a fixed portfolio: its securities will not be sold or new ones bought except in certain limited situations (for instance, when a company is filing for

bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...

or the sale is required because of a

merger Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...

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 Net asset value (NAV) is the value of an entity's assets minus the value of its liabilities, often in relation to open-end, mutual funds, hedge funds, and venture capital funds. Shares of such funds registered with the U.S. Securities and Exch ...

as proceeds to the unitholders. (The unitholders may then have special options for the reinvestment of this principal.)

Bond trusts

Bond trusts issue a set number of units, and when they are all sold to investors, the trust's primary offering period is closed. Bond trusts pay monthly income, often in relatively consistent amounts, until the first bond in the trust is called or matures. When this occurs, the funds from the redemption are distributed to the clients via a

pro-rata ''Pro rata'' is an adverb or adjective meaning in equal portions or in proportion. The term is used in many legal and economic contexts. The hyphenated spelling ''pro-rata'' for the adjective form is common, as recommended for adjectives by some E ...

return of principal. The trust then continues paying the new monthly income amount until the next bond is redeemed. That continues until all the bonds have been liquidated out of the trust. Bond trusts are generally appropriate for clients seeking current income and stability of principal.

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 Incapital, SmartTrust, Invesco Unit Trusts, Millington Securities,

Advisors Asset Management An adviser or advisor is normally a person with more and deeper knowledge in a specific area and usually also includes persons with cross-functional and multidisciplinary expertise. An adviser's role is that of a mentor or guide and differs categor ...

and

Guggenheim Funds Guggenheim Partners is a global investment and advisory financial services firm that engages in investment banking, asset management, capital markets services, and insurance services. Organization The firm is headquartered in New York City an ...

. Most large

s (such as

Merrill Lynch Merrill (officially Merrill Lynch, Pierce, Fenner & Smith Incorporated), previously branded Merrill Lynch, is an American investment management and wealth management division of Bank of America. Along with BofA Securities, the investment bank ...

and

LPL Financial LPL Financial Holdings, Inc. (commonly referred to as LPL Financial) was founded in 1989 and is considered the largest independent broker-dealer in the United States. As of 2021 the company had more than 17,500 financial advisors, over US$1 tril ...

) sell UITs created by these sponsors.

Tax perspective

From a tax perspective, UITs offer a shelter from the unrealized capital gains taxes typical inside of a mutual fund. Because individual UITs 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 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 such potential tax consequence by assembling an entirely new "investment" for each individual investor. Some

exchange-traded fund An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the ...

s (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 they can have lifetimes of over 100 years. For example, the SPDR S&P 500 Trust is scheduled to terminate January 21, 2118, and the PowerShares QQQ Trust is scheduled to terminate March 4, 2124.

References