Unit investment trusts

Unit investment trust (UITs) Unit investment trusts (UITs) pool money from investors and use it to buy a fixed portfolio of securities. Like other investment companies, UITs seek to meet their stated investment objective while aiming to maximize investor returns. UITs must be registered with the Securities and Exchange Commission (SEC). As part of registration, the issuer must prepare and deliver a prospectus to investors. This disclosure document includes the following:

The investment objective

Investor fees

Related risks

The issuer, sometimes called the trust sponsor, registers the UIT and typically selects the securities for the portfolio. The prospectus also sets guidelines the trust sponsor must follow. For example:

“The trust sponsor will only consider investments in speculative-grade corporate debt securities”

To see how a UIT works in practice, consider the Guggenheim Balanced Income Builder Portfolio. Here is the UIT’s prospectus. The overview (page 2) states:

Guggenheim Defined Portfolios, Series 2308 is a unit investment trust … Guggenheim Funds Distributors, LLC serves as the sponsor of the trust. The trust is scheduled to terminate in approximately two years.

A UIT always has a set termination (maturity) date. In this example, the inception date is April 20th, 2023, and the maturity date is April 21st, 2025. At (or just before) the inception date, Guggenheim builds the portfolio. After that, the portfolio generally stays fixed. This particular UIT invests in dividend-paying common stocks and fixed income-based exchange traded funds (ETFs). These securities generate dividend income, which is passed through to UIT investors monthly. Once the portfolio is established, it typically remains unchanged. The trust sponsor may have limited authority to act if an extraordinary event occurs, but most UIT holdings stay in place until liquidation. Because UITs generally don’t have ongoing portfolio management, they don’t charge management fees. They do charge sales charges, operating expenses, and creation & development (C&D) fees. C&D fees compensate the trust sponsor for designing the investment objective and assembling the UIT portfolio. For reference, the Guggenheim Balanced Income Builder Portfolio fee table appears on page 10 of the prospectus. UIT investors generally have two choices while holding their units:

Hold to maturity, when the trust sponsor liquidates the portfolio* and distributes the proceeds to investors. Redeem before maturity, by selling the units back to the issuer at the current net asset value (NAV).

In either case, what the investor receives reflects the current market value of the securities held in the UIT portfolio. *Some UITs allow “in-kind” distributions, which deliver the investor’s share of the underlying securities instead of cash. For example, assume a UIT is comprised of 10 separate shares of stock worth a total market value of $1,000. An in-kind distribution would provide the investor the 10 shares of stock held in the portfolio instead of liquidating the shares.

Sidenote

Secondary market UIT trades While all UITs are redeemable with the issuer, some trust sponsors establish a secondary market to facilitate trades between investors.

Comparison to mutual funds

Test questions may ask you to compare and contrast UITs and mutual funds. They share some features, but they also differ in important ways.

UIT & mutual fund similarities

Registered investment companies

Prospectus provides key disclosures

Redeemable with the issuer

*UIT & mutual fund differences

UITs may trade in the secondary market

Mutual funds are only redeemable (no secondary market)

UITs maintain fixed portfolios

Mutual fund portfolios are managed*

UITs have no management fee

Virtually all mutual funds have management fees

*Even index funds involve trading securities in their portfolio, as indexes change over time. For example, the S&P 500 typically drops and replaces 20-25 stocks annually.

Key points

Unit investment trusts (UITs)

Fixed portfolios of securities

No ongoing portfolio management

No management fees

Redeemable with the issuer

Some UITs may trade in the secondary market