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Introduction and Overview of 40 Act Liquid Alternative Funds
Unit Investment Trusts
Unit investment trusts (UITs) are registered
investment companies with some characteristics of
both mutual funds and closed-end funds. Like mutual
funds, UITs issue redeemable shares, called units. Like
closed-end funds, UITs typically issue only a specific,
fixed number of shares. In contrast to both open-
end and closed-end funds, however, UITs have a pre-
determined termination date that varies according to
the investments held in the portfolio. UITs investing
in long-term bonds may remain outstanding for 20
to 30 years. UITs that invest in stocks may seek to
capture capital appreciation over a period of a year
or a few years. When these trusts are dissolved,
proceeds from the securities are either paid to unit
holders or reinvested in another trust. The model for
the UIT is illustrated in Chart 7.
UITs fall into two main categories: bond trusts and
equity trusts. Bond trusts are divided into taxable and
tax-free trusts. Equity trusts are divided into domestic
or international/global trusts. The first UIT, which was
offered in 1961, held tax-free bonds and, historically,
the majority of UIT assets have been invested in
bonds. However, beginning in the late 1990s, assets
in equity UITs generally have exceeded assets in both
taxable and tax-free bond trusts.
UITs employ a buy-and-hold investment strategy;
once the trust’s portfolio is selected, its securities
typically are not traded. However, UITs may sell
or replace a security if questions arise concerning
the financial viability of the issuer or the security’s
creditworthiness. Most UITs hold a diversified
portfolio of securities, with the extent of each trust’s
diversification described in its prospectus.
The securities in a UIT, which are also listed in its
prospectus, are professionally selected to meet a
stated investment objective such as growth, income
or capital appreciation. Investors can obtain UIT price
quotes from brokerage or investment firms, and some
but not all UITs list their prices on NASDAQ’s Mutual
Fund Quotation Service. Some broker-dealers offer
their own trusts, or sell trusts offered by nationally
recognized independent sponsors.
Chart 7: Unit Investment Trust
Chart 7
Unit Investment Trust
Unit Investment Trust -
Registered Investment Company
Security Listed on Public Exchanges
Key Service
Providers
Limited Number
of Shares
Independent Board
of Directors
Single Pool of Assets
Investment Adviser
Distribution Agents
Key Service
Providers
Administration
Sponsor
Executing
Brokers
Prime
Brokers
Custodian
Investor
Services
Trading & Financing Counterparties
Investment Manager
Start Date
End Date