- A unitary investment trust (UIT) is a type of investment fund that offers a fixed portfolio of stocks, bonds, and other assets for a specified period of time.
- ITU Portfolios are generally fixed and are not actively managed or traded.
- ITUs are particularly popular as diversification tools for independent investors and the retirement community, where stability is appreciated.
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If you’ve avoided mutual funds because of the high management fees or how often they can be traded, you might benefit from a closer look at the Unit Investment Trust, or UIT.
Similar to mutual funds, UITs pool funds from investors to buy a series of assets, which are then bundled and offered into a single unit, making them perfect for portfolio diversification.
Unlike mutual funds, UITs are designed to be bought and held until a specific maturity date, with extremely limited transactions in the meantime. For this reason, funds tend to be particularly popular with buy and hold investors, where stability is most appreciated.
Since December 2020, the Institute of Investment Companies (ICI) reported that there were 4,310 ITUs underway, representing $ 77.85 billion invested, so a booming industry awaits the interested investor.
What is an ITU?
ITUs offer investors a fixed portfolio which may include stocks, bonds or other securities in the form of redeemable units. These are public investments that are bought and sold directly by the company issuing them, or by a broker acting as an intermediary. Investors can redeem ITUs after a set period of time, known as the maturity date.
How does an ITU work?
The purpose of an ITU is that the passively held assets within it provide capital appreciation or dividend income throughout the life of the trust. And while this outcome is not guaranteed, ITUs are regulated by the Securities and Exchange Commission (SEC), so affected investors can breathe easier. Each ITU must register through the commission, which then enforces requirements on everything from where the fund can invest to the circumstances in which transactions can be made.
The average ITU is typically made up mostly of stocks and bonds, but may also contain assets such as mortgages, real estate investment trusts (REITs), master limited partnerships (MLPs), hybrid instruments like preferred shares, and beyond. These assets are often set around a broad theme, such as US stocks offering historically high dividends, or corporate bonds of companies in a specific industry.
Fund managers select which assets to include when setting up the trust, targeting securities that they believe will provide the most capital appreciation over time. They also set the fund’s maturity date, which can be between 15 months and 30 years. After that, the fund remains largely intact until its maturity date.
A successful ITU will earn income for its investors in two different ways: in the form of quarterly or monthly dividends over the life of a fund, and in the form of capital appreciation at the maturity of the fund. Once your UIT expires, you have the option of taking delivery of the underlying assets into your own brokerage account, entering into a similar or identical trust, or liquidating your holdings, which would give you the current cash value.
ITU vs mutual funds
Mutual funds and UITs are similar in that they are mutual funds supervised by a professional fund manager and subject to SEC regulation. Here’s how the two assets diverge:
- Mutual funds are actively managed and UITs are not: The ability to buy and sell assets within a mutual fund increases the potential for capital gains – and, of course, losses. Since UITs do not actively trade, the fees are lower and, as fixed income investments, their underlying securities do not change except in rare cases like bankruptcy or merger.
- Mutual funds and UITs structure dividends differently: While mutual funds are designed to reinvest your dividends, ITU investors may miss out on a market rally because the market rally does not allow for the purchase of additional shares.
- UITs have an expiration date, while mutual funds do not: Just like bonds or CDs, ITUs have defined lifetimes and metrics to be reached before they expire. This makes UITs by their very nature a longer term investment than mutual funds.
- Mutual funds and UITs offer different ways to invest: If you have the cash to invest in a mutual fund, you can buy stocks on demand because the quantity is unlimited. But since UIT has a fixed limit or shares paid up on its initial public offering (IPO), you need to invest in that window or be subject to the vagaries of the secondary market.
Each type of investment has its own limits. But overall, the reason you would see a portfolio organized like an UIT instead of a mutual fund is to minimize short and long term expenses.
ITUs have much lower expenditure ratios and also come with favorable tax conditions. Because of the way capital gains taxes are structured, it is possible to lose money on a mutual fund and pay taxes on earnings you never really enjoyed. For example, if the shares were sold just before you got your hands on them, you could end up with a shared tax liability for someone else’s capital gains.
But that will not happen with an ITU. Because the titles are grouped together when you place the order and not before, the original value – or cost base, as it’s called – is specific to you and can’t burn you down the road.
Who should buy ITUs?
ITUs have advantages to offer every investor, but they are especially great for those who are not interested in building a portfolio of securities by security or who do not want to pay the high expense ratios of mutual funds. actively managed. In addition, the decline in buy-ins on UITs makes them more accessible to new investors or those with less capital.
ITUs are also very popular with people nearing retirement age, as they tend to be more stable investment vehicles. While ITUs do not have the growth potential of a different asset class, their buy and hold strategy is also less risky. Right from the start, you’ll know exactly where you’re invested, how long that investment will last, and roughly how much income you can expect from your investment, all without having to wait to read a prospectus.
If you want to join the ranks of ITU investors, these funds can be purchased directly from the issuer or bought and sold on the stock exchange. Talk to your ITU financial advisor who might be right for you and your situation.
As an investment, UITs are a different option from mutual funds or closed-end funds that offer a winning combination of low costs, reliability, tax protection, and fairly predictable earnings.
There are of course some pitfalls, such as a lack of flexibility and a potential cap on profits, since dividends cannot be reinvested. But if you’re nearing retirement or just trying to stretch a dollar, UITs may prove to be a prime choice for the (semi) conservative investor looking to diversify their portfolio.