Unit investment trusts explained
A unit investment trust (UIT) offers a fixed portfolio of professionally selected stocks or bonds. Since UITs are fixed, once the portfolio of stocks or bonds is chosen, the investments typically don’t change. These portfolios are not actively traded, so you can have a better understanding and visibility into what you own.
Investment companies issue and invest in securities, which appeals to investors who want to buy into a diversified portfolio of securities rather than individual ones. Unlike open-end or closed-end funds, UITs aren’t actively traded and have a stated expiration date.
UIT advantages and disadvantages
Unit investment trusts present investors with a simple way to diversify their investments. Thanks to visibility into the trust and fixed investments, UITs are easy for individuals to understand.
However, the fixed nature of UITs can be a drawback, especially for investors who might prefer a more active approach. Also, as with all types of investments, UITs do carry risk, including market risk, interest rate risk and credit risk.
Types of UITs
Although UITs can invest in a variety of securities, most are typically either stock or bond trusts.
Stock unit investment trusts can focus on capital appreciation, dividend income, or both. Stock trusts are more vulnerable to market risks, making them less steady and less predictable than bond trusts.
Bond trusts typically experience less fluctuation in value, which tends to lower volatility and helps provide stability in the value of your portfolio. Bond trusts are selected based on a stated investment strategy. These strategies usually focus on providing predictable monthly income and are typically categorized as either taxable or tax-exempt.* Fixed-income UITs are portfolios of bonds.
Taxable trusts own bonds such as corporate, U.S. government or taxable municipal bonds. Tax-exempt trusts own tax-exempt municipal bonds. The maturities of the bonds held within the portfolio determine the expected life of the trust, with principal returned as individual bonds mature or are called. Fixed-income UITs with different maturities may help improve the diversification and laddering of your fixed-income portfolio.
How do bond UITs work?
There are three main features of bond UITs that can provide you with a better understanding of how these fixed-income investments work.
Income payments
Fixed-income UITs typically pay you a monthly income, which can be fairly predictable because the bonds in the trust do not frequently change. When bonds mature or are called, this will result in a return of principal and a decrease in income. The remaining bonds in the trust will continue to generate income over time.
Termination date
A fixed-income UIT has a finite life and will return a portion of its principal as the bonds in the trust are called or mature. This is different from bond mutual funds and ETFs, which generally reinvest principal into the fund.
Defined par value
The par value is the amount of principal that investors can likely expect to be returned over the remaining life of the trust. Fixed-income UITs have a defined par value based on the bond holdings in the trust.
What is the difference between a UIT and a mutual fund?
UITs and mutual funds have many similarities and some key differences.
Both UITs and mutual funds offer diversified portfolios that have been professionally selected for investors. They both provide investors with the opportunity to group or pool their money together to buy securities. Low minimum investment requirements are also generally true for both types of investments. Both are subject to industry regulation to ensure accountability and fairness by the U.S. Securities and Exchange Commission (SEC).
Unlike UITs, bond mutual funds and exchange-traded funds (ETFs) don’t necessarily have a set termination and generally reinvest principal back into the fund as the bonds reach maturity. Mutual funds can also be either actively or passively traded, which can impact fee amounts. UITs are overseen by an investment manager, but their portfolio is fixed and not traded.
One of the main characteristics of a UIT is a fixed portfolio that remains unchanged until the predetermined termination date. Since mutual funds are open-ended, they are frequently traded and have no set expiration date. UITs are designed to be a longer-term, hands-off type of investment.
Unit investment trust risks
Fixed-income UITs contain bond investments that are subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease. If a bond within a UIT is called, the principal will be returned, subjecting the investor to reinvestment risk.
Also, bonds in UITs are subject to credit risk. As prices can fluctuate based on market concerns about financial condition, the UIT issuer may not be able to pay interest or repay principal. UITs holding fewer securities can have more price volatility than more diversified trusts with a greater number of holdings.
It's important to carefully review the prospectus with your financial advisor and discuss the risks associated with the specific UIT strategy you are considering.
Learn more about UITs from your financial advisor
If you’re considering a UIT as an investment, we encourage you to contact a financial advisor to help you get started. An Edward Jones financial advisor will work with you to determine what’s important to you now and for the future. UITs offer different investment objectives and portfolios. Together you can review your options and design a personalized investment strategy based on your investment goals.
Unit investment trust FAQs