Unit Investment Trust (UIT)

What Is a Unit Investment Trust (UIT)?

A unit investment trust (UIT) is an investment company that offers a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time. It is designed to provide capital appreciation and/or dividend income. Unit investment trusts, along with mutual funds and closed-end funds, are defined as investment companies.

Understanding Unit Investment Trust (UIT)

Investment companies offer individuals the opportunity to invest in a diversified portfolio of securities with a low initial investment requirement. UITs are sold by investment advisors and an owner can redeem the units to the fund or trust, rather than placing a trade in the secondary market. A UIT is either a regulated investment corporation (RIC) or a grantor trust. A RIC is a corporation in which the investors are joint owners, and a grantor trust grants investors proportional ownership in the UIT's underlying securities.

How Investments Are Sold

Investors can redeem mutual fund shares or UIT units at net asset value (NAV) to the fund or trust either directly or with the help of an investment advisor. NAV is defined as the total value of the portfolio divided by the number of shares or units outstanding and the NAV is calculated each business day. On the other hand, closed-end funds are not redeemable and are sold in the secondary market at the current market price. The market price of a closed-end fund is based on investor demand and not as a calculation of net asset value.

The number of unit investment trusts (UITs) outstanding in the United States, with a market value of $74.84 billion, according to the latest statistics from the Investment Company Institute (ICI).

The Differences Between UITs and Mutual Funds

Mutual funds are open-ended funds, meaning that the portfolio manager can buy and sell securities in the portfolio. The investment objective of each mutual fund is to outperform a particular benchmark, and the portfolio manager trades securities to meet that objective. A stock mutual fund, for example, may have an objective to outperform the Standard & Poor’s 500 index of large-cap stocks.

Many investors prefer to use mutual funds for stock investing so that the portfolio can be traded. If an investor is interested in buying and holding a portfolio of bonds and earning interest, that individual may purchase a UIT or closed-end fund with a fixed portfolio. A UIT, for example, pays the interest income on the bonds and holds the portfolio until a specific end date when the bonds are sold and the principal amount is returned to the owners. A bond investor can own a diversified portfolio of bonds in a UIT, rather than manage interest payments and bond redemptions in a personal brokerage account.

There are stock and bond UITs, but bond UITs are typically more popular than their stock counterparts, as they offer predictable income and are less likely to suffer losses.

Example of a UIT

Guggenheim's Global 100 Dividend Strategy Portfolio Series 14 (CGONNX) was founded on March 15, 2018, with the intent to provide dividend income. It contains 100 diversified positions: 45.16% is invested in large-cap stocks, 26.94% in mid-caps and 27.90% in small caps. Roughly half of the securities are invested in U.S. stocks, with the balance invested in many other countries. Allocation reflects many sectors as well. Each company it holds represents roughly 1% of the portfolio.