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Consider Investing In Unit Investment Trusts
he UIT, or unit investment trust, is not new. But it has gained great popularity as an option to the actively managed open end mutual fund and the closed end mutual fund. The UIT benefits from its simple, yet effective, strategy of selecting a fixed portfolio of securities and holding it for a certain period of time.
This is welcome news to mutual fund investors who are concerned that their manager may change the fund's strategy or direction, whimsically or just to follow the Wall Street crowd. Such abrupt changes create uncertainty but also cast doubt that the fund managers will be able to repeat any prior performance records.
Traditionally, unit investment trusts invested in bonds. However, now investors can purchase many UITs that invest in other securities, such as stocks. These stock (or equity) UITs usually adopt a time-tested strategy that performs well. Most important, those strategies usually beat the performance of most mutual funds and often beat the performance of various index funds (such as the S&P 500 index fund).
How They Work
UITs are established by a sponsor, such as Merrill Lynch, Nuveen or Nike Securities. They assemble the portfolio of stocks or bonds. A trustee, typically a bank, holds the securities for safekeeping, collects income and principal payments, and remits them to the investors, who are called unit holders.
The term (or stated maturity) of unit investor trusts varies with the trust. Bond UITs have maturities from one to thirty years, usually reflecting the types of bonds (long term, short term or intermediate term) in which the trust invests. Stock UITs also vary, but several UITs average eighteen months to two years.
Although UITs have maturity dates, investors should know, first, that most sponsors maintain a "secondary market". This allows investors to buy or sell their trusts prior to the maturity date. In fact, investors can redeem their positions on any business day, for a selling price that may be more or less than the original price paid, depending upon current bid prices of the securities comprising the UIT portfolio.
Second, after a UIT terminates, typically the sponsor has a "rollover" option that allows a continuous flow from one trust to the next of the same type and strategy. Most investors choose to roll over their trusts.
Like load mutual funds, UITs charge front-end loads, or sales charges, to purchase the trust and pay the broker. Most sponsors reduce the sales charge for rollover purchases.
In last month's column, we examined the problem of excessive mutual fund annual expenses. Like mutual funds (load and no-load), UITs charge ongoing expenses to their investors. However, a major advantage of the UIT is the relatively low annual expense. UITs typically have expenses of a quarter or a fifth or what mutual funds charge investors.
The UIT's dramatically lower expense charges are due to three factors. First, their simple form (that is, the absence of active management). Second, the absence of costs associated with constant marketing to new fund investors using the money of current investors (a significant shortcoming of mutual funds). Third, the low trading costs (due to the buy and hold strategy). This buy and hold strategy also fares well with today's current appetite for "tax managed" investments (designed to minimize capital gains taxes).
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Sponsored by James J. Eccleston. This Web site contains material of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment adviser when building and protecting your wealth.
All content Copyright © 2010 Advocate Compliance Partners, Inc. except where noted. All rights reserved.
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