What Are Unit Investment Trusts (UITs)? - dummies

What Are Unit Investment Trusts (UITs)?

By Russell Wild

A unit investment trust (UIT) is a bundle of securities handpicked by a manager. You buy into the UIT as you would an actively managed mutual fund. But unlike the manager of the mutual fund, the UIT manager does not actively trade the portfolio.

Rather, he buys the bonds (or in some cases, bond funds), perhaps 10 or 20 of them, and holds them throughout the life of the bonds or for the life of the UIT.

A UIT, which may contain a mix of corporate bonds, Treasuries, and munis, has a maturity date — it could be a year, 5 years, or even 30 years down the road. Interest payments (or principal payments, should a bond mature or be called) from a UIT may arrive monthly, quarterly, or semi-annually.

Management expenses for a UIT range from 0.2 and 1.0 percent, and you also pay a commission when they’re bought of about 1 to 3 percent. (You don’t pay anything when you sell them.) Contact any major brokerage house if you’re interested.

Should you be interested?

“A UIT can give you the diversification of a mutual fund as well as greater transparency by knowing exactly what bonds are in your portfolio,” says Chris Genovese, senior vice president of Fixed Income Securities, a nationwide firm that provides targeted advice on bond portfolio construction to investment advisors. “They are certainly appropriate for many individual investors, whether in retirement accounts or investment accounts.”

UITs come and go from the marketplace, explains Genovese. “If you are interested in seeing the currently available selection, talk to your broker. Look at the prospectus. As you would with any other bond investment, weigh the benefits and the risks of the bonds in the portfolio, and determine if it looks like the right mix for you.”

Bond ETFs can also give you the diversification and transparency of a UIT, but only a handful of bond ETFs offer target maturity dates, as UITs do.