Investing Unit 5: Unit Investment Trusts



Unit Investment Trusts (UITs) are a professionally selected portfolio of similar securities (e.g., 30-year municipal bonds) packaged together and sold by brokerage firms. Unlike mutual funds, UITs are a “buy and hold” investment, and there is no ongoing portfolio management. UIT sponsors simply buy a collection of bonds (and, with some UITs, stocks) and hold them. Investors receive periodic interest payments and a return of principal at maturity. If bonds within a UIT portfolio are sold or called prior to maturity, some principal may be returned sooner.

UITs are generally sold in $1,000 increments called units. The interest earned is taxable unless a UIT invests in tax-exempt bonds. If an investor needs his/her money prior to maturity, units can be redeemed at their current market value, subject to interest rate risk. Two advantages of UITs are broad diversification and steady cash flow. A specified rate of return is locked in for the duration of a UIT. Two disadvantages are high upfront costs (typically a 3% to 5% sales charge) and the potential for loss if units are sold prior to maturity. For some UITs, selling units prior to maturity may be difficult or costly because secondary markets are small. For more information on UITs, see Unit 8.