The end of the first quarter of 2016 saw investment in unit investment trusts on the rise, though still down substantially from the levels seen in April 2015. The fastest growing segment of unit investment trusts was in the area of tax-free debt, or bond, trusts.

Understanding Unit Investment Trusts

Unit investment trusts are investment companies that buy and hold a fixed, unmanaged portfolio of securities, such as stocks or bonds, for a specified period of time. They represent an alternative type of investment company to mutual fund or closed-end fund investment companies.

Investors in unit investment trusts purchase redeemable units through a broker, typically in $1,000 increments, which can be resold or traded on the secondary market. Units can generally be redeemed at the end-of-day current market liquidation price on any trading day, much like mutual fund shares.

Unit investment trusts aim to provide both capital growth and income in the form of dividends. Unit investment trusts as an investment vehicle exist in one of two forms, either as a regulated investment corporation (RIC), where investors are joint owners of the corporation, or as a grantor trust, where investors have proportional ownership of each of the securities held in the trust’s portfolio.

One of the primary characteristics of a unit investment trust that distinguishes it from an investment, such as a mutual fund or exchange-traded fund (ETF), is the fixed nature of a trust’s portfolio. Unlike mutual funds or ETFs, which continually adjust or rebalance their portfolio holdings, the holdings of a unit investment trust remain relatively fixed. Another distinguishing characteristic of unit investment trusts is that they are usually 100% invested and do not hold cash.

The stated maturity date for a unit investment trust varies according to the asset class of the trust. Trusts that hold bonds may not mature for up to 30 years, whereas trusts that hold stocks may mature as soon as one year from creation. When a unit investment trust reaches maturity, proceeds from the portfolio holdings are either divided among the trust holders or invested in another trust.

2016 Trends for Unit Investment Trusts

The end of the first quarter and beginning of the second quarter of 2016 showed investment in unit investment trusts substantially increasing. In April 2016, total deposits in unit investment trusts grew to $4.8 billion from the March 2016 figure of $3.8 billion.

Of the three categories of unit investment trusts, taxable debt was the only category that experienced a decline in deposits in April. Trusts invested in equities, the largest category, saw an investment increase in April over March from $3.6 billion in deposits to $4.6 billion in deposits. Trusts invested in tax-free debt securities enjoyed an increase in deposits from $1.18 million to $1.33 million. However, investment in taxable debt trusts saw total deposits in April decline to $55 million from the March level of $75.4 million.

Investment deposits in unit investment trusts are still down year over year as compared to 2015. In April of 2015, total deposits in trusts came to $6.3 billion, which was substantially higher than the April 2016 deposit total of $4.8 billion.

The opening of the second quarter of 2016 saw a total of 161 new unit investment trusts created and selling unit shares. The overwhelming majority of new trusts created, 139, were equity trusts.

Year-End Unit Investment Trust Figures for 2015

As of the end of 2015, the total market value of all existing unit investment trusts was approximately $94 billion. In comparison, total investment in unit investment trusts is just a fraction of the $15.7 trillion total market value of existing mutual funds. Equity-invested unit investment trusts, with a total of approximately 2,600 trusts, accounted for roughly half of the a total of 5,188 trusts, but the $80.4 billion market value of equity trusts constituted more than 80% of the total dollar value of all trusts.

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