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| Product Overview |
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| A unit investment trust (UIT) is a fixed portfolio of professionally selected securities made available by a sponsor. Investors purchase units which represent a pro rata share of the UIT. Unlike mutual funds, which continually buy and sell securities, a UIT’s holdings are fixed and specified in its prospectus. The investor knows exactly what securities are in the UIT, when it is scheduled to mature, and what income stream it is expected to generate. |
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| UITs may be suitable for investors with a defined investment goal, who seek a simpler way to create a portfolio meeting that goal. UITs can offer a lower minimum investment and help investors gain a diversified position in a concentrated segment of either the credit or equities market. |
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| Types of UITs |
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| There are three basic types of UITs: |
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Taxable fixed income - Portfolios of U.S. Treasury, U.S. agency, and corporate issues that provide monthly, quarterly, or semi-annual income. |
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Tax advantaged fixed income - Portfolios of municipal bonds that provide monthly or semi-annual tax-free income. A portion of the interest they generate may be subject to state or local taxes. Also, for some taxpayers, portions of income earned may be subject to federal or state alternative minimum taxes. Investors should consult a tax professional regarding their individual tax situation. |
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Equities - Portfolios of equity securities that provide potential for capital appreciation and/or income. |
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| Features and Benefits |
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In general, many fixed income UITs are either insured or are rated investment grade. Details are stated in the prospectus for each UIT. |
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Each unit of the UIT represents a pro rata share of a diversified portfolio of securities. Diversification can help minimize the credit risks of individual securities within the portfolio. Some fixed income UITs may concentrate in bonds of a particular type of issuer and, therefore, are less diversified and subject to greater risk than a more diversified portfolio. |
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With a few exceptions, an investor can sell a UIT at its liquidation price in the secondary market. Like mutual funds, UITs have a public offering price (POP) and a net asset value (NAV). |
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Investors may pay a sales charge or load when they purchase units (also known as a “front-end sales load”) or a deferred or “back-end” sales charge when units are redeemed. UITs that charge front-end sales loads sometimes offer discounts on the sales load based on the dollar amount or number of units purchased. The UIT discount breakpoints are substantially similar to breakpoint discounts in the sale of mutual fund shares.
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| Most fixed income UITs generally require a minimum investment of $5,000. Most equity UITs require a minimum investment of $1,000. |
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Fixed income UITs are designed to pay a consistent distribution amount each payment period but does change as each bond in the trust is retired and their capital investment is repaid. As a result of changing interest rates, refundings, or defaults on the underlying securities held in the UIT portfolio, and other factors, distribution amounts may fluctuate. |
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As with shares of mutual funds, unit prices of UITs fluctuate daily and there is no guarantee that the price, when redeemed, will equal or exceed the purchase price. Since fixed income UIT portfolios are fixed, investors can easily review the specifics on each security and determine when to expect returns on their investment capital. |
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Many UITs are insured for the timely payment of interest and principal. These UITs usually carry a lower yield than uninsured UITs because of the cost involved in purchasing this insurance by the sponsor. |
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While the lack of management fees is one reason investors are attracted to UITs, and while intensive research goes into the original selection of the securities, holding a security that does not provide ongoing management may be disconcerting to an investor. |
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Fixed Income UITs are susceptible to fluctuations in interest rates. If interest rates rise, bond prices within the UIT and the value of each unit will decline despite the lack of change in bond coupons and maturities. |
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If any of the bonds within a UIT are called, the par value of the UIT will drop and the principal will be paid out directly to the unit holder just like a regular bond. Unlike a mutual fund, which buys additional bonds if a bond it holds is called or matures, a UIT pays the proceeds directly to the unit holders. There is no reinvestment. |
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There are some cases when an investor cannot sell a UIT unit. If the UIT is at the end of its life and the price per unit is very low, or if it no longer has an offering price, then it is likely that the sponsor will no longer accept liquidations on the trust. Units sold prior to maturity may be subject to a gain or loss. |
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Some fixed income UITs may concentrate in bonds of a particular type of issuer and, therefore, are less diversified and subject to greater risk than a more diversified portfolio. |
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