Unit investment trusts

Unit investment trusts (UITs) are comparable to mutual funds but offer some unique investment advantages.

What is a UIT?

Like mutual funds, UITs are portfolios of professionally selected stocks or bonds. However, unlike mutual funds, UITs are fixed, which means once those stocks or bonds are chosen, they typically don’t change. Because these securities aren’t actively managed, investors have more visibility into what they own. UITs can usually be sold on any business day at the current market price, which may be more or less than the investor initially paid. 

Fixed-income UITs are portfolios of bonds 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.”1

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 the 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 does a fixed-income UIT work?

These key features of fixed-income UITs help explain how they work:

Income payments 
Fixed-income UITs typically pay monthly income, which can be fairly predictable, because the bonds in the trust do not frequently change. When bonds mature or are called, the result is a return of principal and a decrease in income as remaining bonds in the trust 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 
Fixed-income UITs have a defined par value based on the bond holdings in the trust. The par value is the amount of principal that investors can likely expect to be returned over the remaining life of the trust. This is different from mutual funds and exchange-traded funds (ETFs), which have only a net asset value (NAV) that floats based on daily market price changes.

How UITs are taxed

It’s important to understand the tax considerations of UITs. The termination of a trust is a taxable event, regardless of whether the proceeds are rolled over into a new trust. Interest and dividend payments, returns of principal and termination of UITs are the most common taxable events to consider. Review the prospectus and consult with a tax professional to understand your personal situation. UIT fees and expenses may include: 

• Sales charges 

• Organizational costs 

• Annual administrative expenses

UIT 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, and the issuer may be unable to pay interest or repay principal. UITs holding fewer securities could have more price volatility than more diversified trusts with a greater number of holdings. Review the prospectus with your financial advisor and discuss the risks associated with the specific UIT strategy you are considering.

Are UITs a good investment for you?

As with any investment, we recommend thoroughly comparing UITs to all investment alternatives to understand the differences and trade-offs before purchasing, including fees and expenses. That’s where an Edward Jones financial advisor can help. We have an established process to understand what's important to you and build strategies that help create a better future for you and those around you. Together, we can review your situation and determine the appropriate approach for you.

Important information:

1. The income from bonds within a nontaxable bond UIT is generally federal tax-free. However, activity inside the trust portfolio, including liquidations from other unitholders, may cause early returns of principal distributed to the client. Some or all of the trust’s income and any principal distributions may be reclassified as taxable income or taxable capital gain distributions. This reclassification will be disclosed on the client’s year-end tax documents.

 

Edward Jones, its employees and financial advisors are not estate planners and cannot provide tax or legal advice. You should consult your estate-planning attorney or qualified tax advisor regarding your situation.