Unit Investment Trusts (UITs)

Moving from actively managed products to the simplest investment company structure: the UIT. Its defining characteristic is what it does NOT have: no board of directors, no investment adviser, and no active management.

Structure

A UIT buys a fixed portfolio of securities and holds them with little or no change for the life of the trust:

  • No active management: no investment adviser making ongoing buy/sell decisions
  • No board of directors (unlike management companies)
  • Has a set termination date (determined at creation, often tied to bond maturity dates)
  • Issues redeemable units (not shares) representing an undivided interest in the portfolio
  • The portfolio is selected at creation and remains essentially unchanged

Think of it this way: The fixed nature of a UIT means the investor knows exactly what they're getting. There's no risk of "style drift" where a manager changes the investment strategy.

Exam Tip: Gotchas

  • UITs issue "units," not "shares." This terminology distinguishes them from mutual funds and closed-end funds.
  • UITs have a set termination date (unlike mutual funds, which operate indefinitely). The termination date is set at creation.

Fees

Because there's no active management, UITs have a different cost structure:

  • No separate management fee (since the portfolio is not actively managed)
  • Investors pay a creation and sales charge (one-time, at purchase)
  • Annual trust operating expenses (custodian, trustee, administrative fees) are typically low
  • Overall cost structure is generally lower than actively managed mutual funds

Redemption

  • Unit holders may redeem units at net asset value (NAV) through the trust sponsor
  • Upon termination, the portfolio is liquidated and proceeds distributed to unit holders
  • Some UITs offer a rollover option to reinvest proceeds into a new UIT series

Types of UITs

  • Equity UITs: Fixed portfolio of stocks (e.g., "Dogs of the Dow" strategy). Set termination date, often 1-5 years.
  • Bond UITs: Fixed portfolio of bonds. Termination often matches bond maturity dates. The trust holds bonds to maturity, distributes interest income along the way, and returns principal when bonds mature.

Exam Tip: Gotchas

  • A UIT has NO board of directors and NO investment adviser. If a question describes a "passively managed" product with a fixed portfolio and termination date, it's a UIT, not an index mutual fund.
  • An index fund still rebalances; a UIT does not. Index funds have active management in the form of rebalancing to track an index. A UIT holds its original portfolio unchanged.