Unit Investment Trusts (UITs)
Unit investment trusts are the third type of investment company under the Investment Company Act of 1940 (ICA), but they operate very differently from management companies.
Key Characteristics
- Fixed portfolio of securities assembled at creation (bonds or stocks)
- Not actively managed - no investment adviser making ongoing buy/sell decisions
- Supervised by a trustee (not a board of directors)
- Have a stated termination date (especially bond UITs)
- Issue redeemable units (units of beneficial interest) - investors can redeem with the trust
- Once a security matures or is sold, proceeds are distributed (not reinvested)
- No management fee (has creation/sales charge and trustee fee)
- Income passes through to unit holders
- Must register under the ICA
Exam Tip: Gotchas
- UITs are NOT actively managed. If a question describes a pooled investment with a fixed portfolio and a termination date, it is a UIT. The lack of a management fee (no ongoing advisory fee) is a key distinguishing factor.
UITs vs Mutual Funds
| Feature | Mutual Fund (Open-End) | UIT |
|---|---|---|
| Management | Actively managed by adviser | Fixed, unmanaged portfolio |
| Portfolio changes | Securities bought/sold continuously | No changes (buy-and-hold) |
| Oversight | Board of directors | Trustee |
| Termination | No set end date | Stated termination date |
| Fees | Management fee + expenses | No management fee; creation charge + trustee fee |
Think of it this way: A UIT is like buying a pre-made basket of bonds (or stocks) and holding them until maturity. The portfolio is locked in at creation. Unlike a mutual fund, no adviser is making ongoing decisions about what to buy or sell.
Exam Tip: Gotchas
- UITs are NOT mutual funds. Different legal structure, have a termination date, and have no board of directors (trustees instead).