Unit Investment Trusts vs. Mutual Funds

UITs vs. Mutual Funds: Similarities and Differences

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Unit investment trusts (UITs) are an older type of investment that has become less popular over the last few decades. UITs are similar to mutual funds and exchange-traded funds because they are a basket of investments that pool investors' finances.

Learn the similarities and differences between UITs and mutual funds and find out how you can use them in your portfolio.

What Are UITs?

Unit investment trusts are funds that investors can pool their finances into and purchase shares of stocks, bonds, or other securities. Investments are selected by the company that manages the fund and are not exchanged for other assets but bought and held for the trust's lifetime.

A UIT is a trust fund, and the portfolio is established at the inception date, holding the original securities until termination of the UIT. The investors can choose to keep their returns or reinvest them into the next UIT (if it is a series).

Unit investment trusts are usually created in series. When one terminates, there is generally another waiting for investors to roll their finances into.

UITs are like closed-end funds, issuing a set number of shares. These shares are called “units.” The securities within a UIT portfolio can be actively traded, but only between investors participating in the fund.

Similarities Between 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.

UITs and mutual funds are similar because they are:

  • A diversified portfolio of stocks, bonds, or other investments
  • Required to distribute capital gains and dividends to shareholders
  • Regulated by the U.S. Securities and Exchange Commission (SEC)

Fund managers can diversify a portfolio to align with its design. If they want a high-risk, high-reward UIT, they can choose only high-risk investments. Fund managers might design a unit that slowly builds returns over a long period with low risk by combining lower-risk assets.

Capital gains are the profits you get from sales of assets. When units are sold or the UIT terminates, the managers must distribute earnings to the shareholders. Periodic payments, called dividends, must be paid to shareholders as well.

The SEC regulates exchange activities on U.S. exchanges. UITs are purchased and sold on U.S. exchanges, so they are subject to regulations.

Differences Between UITs and Mutual Funds

Here are the differences between UITs and mutual funds:

Unit Investment Trust Mutual Fund
Have a termination date No termination date
Have a set number of shares issued at initial offering New shares can be offered and shares can be closed
No active management Actively managed
Fund sponsors can facilitate buying and selling of shares between fund investors and can allow unit exchanges Shares can be rotated (exchanged) between different funds, but not between investors

Mutual funds do not have expiration dates. UITs are designed as a long-term investment strategy with termination schedules. They generally terminate anywhere between one and 20 years. UITs are sometimes built in a series, so you can place your finances into the next one if yours terminates. Otherwise, you get to keep your returned principal (if there were no losses) and gains (if there were any).

When a unit investment trust is formed, the design limits the number of available shares. The shares cannot be split or merged, and the number of shares cannot be increased or decreased.

Mutual funds are managed, which means that the underlying stocks, bonds, or other assets can be changed if they do not meet expectations. UITs are not actively managed this way; however, trust sponsors can replace assets (a rare occurrence) that are not performing well if necessary.

Unit investment trusts generally allow shares to be traded between existing shareholders, and sponsors can facilitate the exchanges for them.

Investors are also entitled to exchange units if the trust's sponsors have received permission from the SEC.

You're allowed to rotate finances between mutual funds, enabling you to rebalance your portfolio as market conditions change or as you age. UITs don't offer this because the securities are set.

Adding a UIT to Your Finances

Long-term UITs are hard to find. If you're considering using one to balance risk in your portfolio or are looking for a short-term investment, the majority of trusts have terms of one year. The risk of investing in a UIT depends upon the units it is built around.

If the shares are from large market capacity companies that have weathered many market fluctuations, there might be less risk than from shares of small market capacity companies that haven't yet worked through a market downturn.

Your level of acceptable risk and investing goals and interests determine which type of UIT you can pull into your portfolio. You should also consider whether you want to continuously roll into new investments as your UIT terminates annually.