Investing in UITs

You may be familiar with the most common types of investment companies — mutual funds and exchange-traded funds (ETFs) — but how much do you know about a third type: unit investment trusts (UITs)? They are structured differently and offer unique features that may be appealing to some investors.

A Fixed Portfolio

A UIT purchases a portfolio of stocks or bonds and sells shares of the portfolio — called “units” — to individual investors. Once the investments are selected, the portfolio is generally designed to be fixed, with a specified termination date, thus offering investors a relatively clear picture of its holdings throughout the life of the investment. All UIT dividend and interest payments are distributed as they are received and typically can be reinvested. Distri­butions are not guaranteed.

When a UIT reaches its termination date, the trust is dissolved and proceeds are paid to investors. The sponsor may offer investors the opportunity to roll over the proceeds to a new UIT on a tax-deferred or non-tax-deferred basis, depending on the structure.

Q2 2020 underlying securities in 4,471 UIT trusts: 2,346 trusts in stocks; 1,579 in tax-free bonds; 546 in taxable bonds.

Laddering Investments

Working with defined termination dates could be useful in staggering investments, similar to building a bond ladder with individual bonds. Bond-based UITs typically hold a varied portfolio of bonds with maturity dates that coincide with the trust termination date, so investing in bond UITs with different termination dates may provide an opportunity to reinvest assets at different times within a changing interest-rate environment. Stock-based UITs might offer a similar opportunity to reinvest under varying market conditions.

Most UITs issue only a specific, fixed number of units, but some trust sponsors maintain a secondary market where outstanding units can be bought and sold. If you’re interested in adding a unit investment trust to your portfolio, be sure that you understand the underlying investments, the termination date, and other provisions.

The return and principal value of UITs, stocks, bonds, mutual funds, and ETFs fluctuate with changes in market conditions. When sold, UIT units, stock and mutual fund shares, and bonds redeemed prior to maturity may be worth more or less than their original cost. UITs might carry additional risks, including the potential for a downturn in the financial condition of the issuers of the underlying securities.

UITs, ETFs, and mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company and the underlying investments, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

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