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).