Unit Investment Trusts vs. Mutual Funds
UITs vs Mutual Funds: Similarities and Differences
Unit investment trusts (UITs) may be the least understood, and certainly least utilized, of all of the US registered investment companies. UITs are an investment that can be compared to mutual funds and exchange-traded funds. Learn the similarities and differences of UITs vs mutual funds.
What Are 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 of UITs vs 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.
Here are the similarities shared by UITs and mutual funds:
- 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 of UITs vs Mutual Funds
Here are the differences between 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 The Balance? 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.”
One may conclude 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 outweigh that of investing in UITs.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.