A unit investment trust (UIT) is a U.S. investment company that buys and holds a fixed, unmanaged portfolio, generally of stocks and bonds, as redeemable "units" to investors for a specific period of time. UITs are issued via an initial public offering (IPO). They are designed to provide capital appreciation and/or dividend income.
Like mutual funds, UITs are collective investments in which a large pool of investors combine their assets and entrust them to a professional portfolio manager. While the portfolio is constructed by professional investment managers, it is not actively traded. So after it is created, it remains intact until it is dissolved and assets are returned to investors. Securities are sold or purchased only in response to a change in the underlying investments, such as a corporate merger or bankruptcy.
There are two types of UITs: stock trusts and bond trusts. Stock trusts conduct initial public offerings by making shares available during a specific amount of time known as the offering period. Investors' money is collected during this period and then shares are issued. Stock trusts generally seek to provide capital appreciation, dividend income or both. Unlike mutual funds, which are required to adhere to certain rules of diversification and must hold a minimum number of different securities, UITs may have more concentrated portfolios. They can own shares of stock in just a few companies. This is why there are no mutual funds that use a pure "Dogs of the Dow" approach. The "Dogs" strategy entails buying the 10 highest yielding stocks in the Dow Jones Industrial Average, holding them for a year and then repeating the process. Since a mutual fund can't own just 10 different companies, a number of UITs have been created to implement the Dogs of the Dow strategy.
Bond UITs have historically been more popular than stock UITs. Investors seeking steady, predictable sources of income often purchase bond UITs in an effort to obtain income through monthly, quarterly or semi-annual payments. These investments usually consist of government bonds and corporate bonds that are purchased and held to maturity. As each bond matures, assets are paid out to investors. Bond UITs come in a wide range of offerings, including those that specialize in domestic corporate bonds, international corporate bonds, domestic government bonds (national and state), foreign government bonds or a combination of issues.
The steady and predictable income stream makes bond UITs very popular with retirees looking for supplements to their income. One risk that comes with a UIT is that, because the interest on the UIT is fixed for the life of the security, it is more susceptible to inflation. For the most part, UITs are fairly low-risk investments, but stock UITs depend heavily on the performance of the stock market and in a stock trust there is no certainty of return, like there is in a bond trust.
It is useful to understand some of the common terms associated with UITs. Understanding these terms provides insight into how the investments work and how to evaluate them.
Early Redemption & Termination Date
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