Unit Investment Trusts vs. Mutual Funds

UITs vs. Other US Registered Investment Companies

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Unit investment trusts (UITs) may be the least understood, and certainly least utilized, of all of the US registered investment companies. As of December 31, 2008, according to the 2009 Investment Company Fact Book, assets in US registered investment companies were as follows:

  • Open-End Funds (Mutual Funds) $9.6 trillion in 8022 funds
  • Exchange-Traded Funds (ETFs) $531 billion in 728 funds
  • Closed-End Funds (CEFs) $188 billion in 646
  • Unit Investment Trusts (UITs) $28.5 billion in 5,984 trusts

Compare the above numbers to 1990 and 1998:

  • Open-End Funds (Mutual Funds) 113 billion in 3079 funds in 1990, $1.4 trillion in 7314 funds in 1998
  • Exchange-Traded Funds (ETFs) $0 in 0 funds in 1990, $6.2 billion in 29 funds in 1998
  • Closed-End Funds (CEFs) $59 billion in 249 funds in 1990, $159 billion in 492 funds in 1998
  • Unit Investment Trusts (UITs) $105 billion in 12,131 trusts in 1990, $94 billion in 10,966 UITs in 1998

Structural Overview of UITs

Unit Investment Trust (UITs) can be thought of as a hybrid investment; sharing some of the qualities of mutual funds and some of the qualities of closed-end funds.

UITs, like closed-end funds, issue a set number of shares. These shares are called “units.” Unlike closed-end funds (and open-end funds), the securities within a UIT portfolio cannot be actively-traded.

A UIT portfolio is established at the inception date and holds the original securities until termination of the UIT. At the termination date the UIT shareholders either receive the proceeds of their investment or they can reinvest in the next UIT series (if available).

Similarities in UITs and Mutual Funds

UITs are similar to mutual funds in that an investor can redeem shares (versus trading on a stock exchange) from the UIT sponsor. But unlike mutual funds, UIT sponsors might also maintain a secondary market in the UIT. In other words, the UIT sponsor might facilitate buys and sells between investors in order to avoid depletion of the UIT's assets.

  • A diversified portfolio of stocks, bonds, or a combination of the two
  • Required to distribute capital gains and dividends to shareholders
  • Regulated by the U.S. Securities and Exchange Commission

Differences in UITs and Mutual Funds

  • UITs have a termination date and mutual funds do not have a termination date.
  • UITS have a set number of shares at issuance and mutual funds continually offer new shares (unless the fund is closed).
  • UIT assets cannot be actively managed (the investments within the UIT are established at inception and are generally not changed). Mutual funds can be actively managed.

What’s the Problem with UITs?

So, what’s the problem with UITs? Why have assets diminished severely in UITs versus mutual funds and ETFs? This question is fundamentally impossible to answer. The answer may be that UITs are misunderstood. But a better answer is that UITs are not marketed as heavily as mutual funds and ETFs -- for good reason.

Have you ever read about a hot UIT? Is there a Guide to UITs at About.com? Do you know why you would buy a UIT rather than another US registered investment company even after reading this article? The answer to all three questions is a simple “no.”

Conclusion on UITs

We might sumise that UITs are not as profitable for the fund sponsor as other investment companies so there are fewer UITs being created today than in 1990; the termination feature creates a taxable event for the investor; and the advantages of investing in mutual funds and other investment companies outweight the advantages of investing in UITs.