Unit Investment Trusts (UITs)

1) Structure:

UITs are a type of investment company that offers shares (units) in a fixed portfolio of securities (such as stocks or bonds) arranged based on specific investment objectives and strategies. UITs are established under a trust indenture, and a trustee manages the trust. Unlike mutual funds, UITs have a defined termination date, at which assets are liquidated and proceeds are distributed to unit holders. The securities in a UIT do not change throughout the life of the trust, making it a "buy and hold" investment.

2) Adding or Removing Investors:

New investors can buy units of a UIT on the secondary market, and existing investors can sell their units before the trust's termination date. However, the number of units is fixed at the creation of the UIT, and no new units are created after the initial offering.

3) Modifications Over Time:

• Can be Done: The trust's holdings do not change, but the trustee may replace securities if the issuers default or are called before the maturity date.

• Cannot be Done: No active management occurs; securities cannot be traded or managed to take advantage of market conditions.

4) Transparency:

UITs provide high transparency. They must file regular reports with the SEC, including the prospectus and annual financial statements, detailing the specific fixed portfolio and any changes due to defaults or calls.

5) Types of Companies That Use UITs:

Investment companies and financial institutions create UITs. They are particularly used by firms looking to provide investors with tailored fixed portfolios, such as blue-chip stocks or municipal bonds.

6) Pros and Cons:

• Pros:

  • Diversification through access to a variety of securities in a single investment.

  • Transparency due to fixed holdings.

  • Lower management fees compared to actively managed funds.

  • Suitable for targeted investment strategies with a clear end date.

• Cons:

  • Lack of flexibility; no changes in holdings except for issuer defaults or calls.

  • Investors cannot capitalize on market changes through the trust.

  • Illiquidity of the market for units, which may affect pricing.