Unit Investment Trust
Encyclopedia
A Unit Investment Trust (UIT) is a US investment company offering a fixed (unmanaged) portfolio
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...

 of securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...

 having a definite life. UITs are assembled by a sponsor and sold through brokers
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...

 to investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...

s.

Types

A UIT portfolio may contain one of several different types of securities. The two main types are stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

 (equity) trusts and bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

 (fixed income
Fixed income
Fixed income refers to any type of investment that is not equity, which obligates the borrower/issuer to make payments on a fixed schedule, even if the number of the payments may be variable....

) trusts.

Unlike a mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...

, 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
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

 or the sale is required due to a merger
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...

).

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
Net asset value is a term used to describe the value of an entity's assets less the value of its liabilities. The term is most commonly used in relation to open-ended or mutual funds because shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net...

 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
Maturity (finance)
In finance, maturity or maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal is due to be paid....

. When this occurs, the funds from the redemption are distributed to the clients via a pro rata return of principal. The trust then continues paying the new monthly income amount until the next bond is redeemed. This 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 SmartTrust, Van Kampen
Van Kampen
Van Kampen may refer to:* Seifert–van Kampen theorem, sometimes just called van Kampen's theorem, which describes an aspect of algebraic topology.*Egbert van Kampen, the mathematician who devised the theorem* Robert Van Kampen, an American businessman....

, Millington Securities, Advisors Asset Management, Inc. and Guggenheim Funds. Most large brokerage firms (such as Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...

 and A. G. Edwards) sell UITs created by these sponsors.

Tax perspectives

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 "fund" for each individual investor.

Some exchange-traded fund
Exchange-traded fund
An exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE...

s (ETFs) are technically classified as UITs: however, ETFs usually do not have set portfolios
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...

 (they are either managed or update automatically to follow an index), and they do not have defined lives.
The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
x
OK