Introduction to Unit Investment Trusts (UITs)

Unit Investment Trusts are related to mutual funds, but aren’t the same. Here we discuss these less popular investment vehicles.

UITs are investment companies that manage investors’ funds by purchasing a variety of securities such as stocks and fixed-income products (i.e. bonds). UITs can be purchased directly from the investment company or bought in the secondary market.

Often, a minimum investment of $1,000 is required, making these less accessible to small investors in comparison to other investment vehicles such as Exchange Traded Funds that trade as shares. Buying a few ETF shares may add to less than a $1,000 for an easy start in investing. Given that, UITs aren’t nearly as popular as ETFs.

There are other differences when it comes investing in UITs. One is related to taxation. When a UIT purchase is made, an investor gets a cost basis for tax purposes as of the date of purchase. On the other hand, open-end mutual funds investors share tax liabilities regardless of the date of purchase when it comes to capital gains and dividends the fund paid to the investors. (This is not related though to the capital gains investor realizes when selling the fund at a profit, but rather to gains related to fund operations.)

There is another major difference between UITs and other funds. UITs have a termination date. Once a UIT manager purchases securities at the start of the trust, usually the investments are held until the termination date, so these trusts aren’t actively managed. Investors still have a way out of the investment prior to the termination date, but the terms of exit need to be investigated for each particular fund by reading its prospectus.

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