Unit Investment Trust Funds (UIT’s) are a form of investment that pool investor’s money into specific duration allocations of bonds, tax-free investments or equities. In the case of bond UIT’s the risk is relatively low and a monthly fixed income is afforded to the investor and in the case of tax free bonds may yield a tax free income. Tracking UITS depends on the type of structure the UIT has i.e. if the UIT is an exchange traded fund (ETF) it can be tracked via conventional means such as stock exchange listings however not ETF UIT’s may require direct inquiry via accounts and brokers. Unit investment trusts can be incorporated into an investment strategy while taking their unique advantages and disadvantages into account.
TRACKING PRICE MOVEMENTS IN UIT FUNDS:
Unit investment trusts are sometimes similar to Exchange Traded Funds (ETF’s) with the exception of being of fixed duration i.e. the fund itself has a lifespan at the end of which the assets are sold and redistributed to ‘unit’ holders. UIT’s are purchased at primary offerings and via brokers and are not always traded in the same way as stocks, mutual funds and ETF’s depending on the type of UIT. However, some types of equity based UIT’s can be tracked via exchange listings such as the NASDAQ, NYSE or AMEX and the majority of UIT’s are equity funds.
Since some UIT’s are exchangeable via major stock exchanges as ETF’s, they can be tracked using the same means as stocks, mutual funds and exchange traded funds. Brokerage houses, financial websites and investment banks can all provide up to date information regarding the market price of a particular UIT. An example of a UIT is ‘PowerShares QQQ’ ticker QQQQ which is an equity UIT that is designed to diversify and correspond to the Nasdaq 100 index.
UITs that invest in bonds and are not actively traded fluctuate in market price based on the valuation of bonds within secondary markets that are not necessarily public exchanges. Such being the case, tracking bond UIT’s can be facilitated by contacting the UIT company directly. For example, if a UIT joint owner i.e. investor owns a portion of a UIT, that investment will be listed in the account information of the UIT holder and thus trackable via one’s account with the investment company through which the portion of the UIT was purchased.
TYPES OF UNIT INVESTMENT TRUSTS:
Unit Investment Trusts can be divided into two main categories, 1) Bond UIT’s, and 2) Equity UIT’s. More equity UIT’s currently exist than Bond UIT’s of which the non-taxable income variety is greater. Equity UIT’s are classified according to the exchange in which they specialize (pathtoinvesting.com), three of which are listed as follows:
*Standard and Poor’s Index Depository receipts (SPDR)
*Dow Jones Index based equity investments (DIAMOND)
*NASDAQ index based equity investments (QUBES)
Additional UIT’s invest in the shares companies within multiple exchanges and/or in the shares of utility companies that often pay considerable dividends and are perceived as having less volatility than other types of equity.
Bond UIT’s invest in either tax-free bonds or taxable bonds using the funds provided by investors. Since some bonds such as treasury bonds can only be purchased in high denominations, the pooled funds allow investors to indirectly purchase treasury bonds via the UIT. These bond UIT’s can be identified and purchased directly through an investment company.
BENEFITS AND DISADVANTAGES OF UNIT INVESTMENT TRUSTS:
There are both pros and cons to unit investment trusts. Bond UIT’s tend to be lower risk, however the yield may also be lower than some higher risk ETF’s or mutual funds. Since UIT’s are highly regulated and insured these investments can be a safer way to invest than mutual funds and make possible diversification in bonds that may otherwise be unobtainable due to minimum purchase requirements. Some of the pros and cons associated with UIT’s are listed below:
PROS of UIT’s:
*Fixed monthly income
*Potential for less risk
*Diversification through managed investment pool
*Highly regulated via the Investment Company Act of 1940 and the Securities Act of 1933
*May provide tax free income depending on the type of UIT
*Relatively low minimum investment i.e. low entry barrier
CONS of UIT’s:
*Do not incorporate dividend reinvestment (DRIPS)
*Do not invest in commodities
*May not yield high double digit returns
*Have sales fees and operational fees
*Opportunity cost may outweigh duration yield
UIT’S AND INVESTMENT STRATEGY:
Unit investment trusts can be useful in diversifying and lowering risk in an investment strategy. These types of funds may be particularly useful for individuals seeking to broaden a Roth IRA with tax-free investments that provide regular and consistent income. Such being the case the steady accumulation of wealth toward retirement planning may be better facilitated and/or enhanced through the use of UIT’s in retirement planning portfolios.
Additionally, since UIT’s are often insured by their sponsors, the monthly income paid out by UIT’s is subject to lower risk than corporations offering uninsured dividends based on profitability ex. Mortgage real estate investment trust (MREIT) This insurance, combined with diversification, and generally lower risk make UIT’s a potentially good source of consistent income for a retirement plan or more stable income distribution plan. A portfolio consisting entirely of UIT’s may benefit investors with large amounts of capital but may also entail lower overall investment yield.
SUMMARY OF UIT’S:
Unit investments trusts can be purchased through investment companies and brokers who deal in UIT’s. UIT’s are not always traded via public exchanges and therefore may require the services of fixed income financial planner or specialist. UIT’s invest in equities and bonds some of which aim for beta coefficients similar to exchange indexes such as the S&P 500, Nasdaq 100 etc. Specific advantages and disadvantages can be associated with unit investment trusts and these features can be considered in terms of an individual’s investment, financial planning and retirement goals through an investment strategy. Tracking UIT’s depends on 1) the type of fund it is 2) the financial instruments the UIT invests in and 3) the dealers and sponsors who facilitate the fund. It is generally more expedient to track an ETF UIT than a bond UIT.