Unit Investment Trusts (UITs)

Unit investment trusts (UITs) are fixed portfolios of a particular asset class that were created to effect some particular investment strategy. They are like closed-end mutual funds, and registered under the Investment Company Act of 1940, but their holdings are fixed and cannot be changed. The majority of UITs held municipal bonds, but equity UITs that hold stocks and other securities are becoming more numerous.

They have a maturity date. In a bond fund, the maturity date is the date the bonds mature. Equity UITs have a specified maturity date that is determined by the strategy being pursued. For instance, there are UITs that use the Dogs of the Dow strategy, which is to buy the highest yielding stocks of the Dow Jones Industrial Average, and hold them for 1 year. Then sell them, and buy the stocks with the current highest yield, which involves rolling 1 UIT into another. Defined Asset Funds (also, Equity Investor Funds) are another of example of UITs—offered by Merrill Lynch, Salomon Smith Barney, Prudential Securities, Morgan Stanley, and UBS/Paine Webber Defined Asset—that invest in a particular class of securities, such as blue chips, REITs, or utilities. Sometimes the securities are screened from a particular index in the hopes of outperforming the index. Some UITs have specialized holdings, such as companies that are likely to be acquired, or that focus on renewable energy, or they might hold a particular type of security, such as preferred stock.

Investors in the unit investment trusts have an undivided interest in the principal and income of the portfolio, and can redeem their shares to the issuer for their net asset value.

The disadvantages of unit investment trusts are the high fees and the complete lack of any real performance history.

UITs are usually sold by brokerages, which charge a commission. There is often a front load and a back load, as well as ongoing management fees. Some UITs also charge 12b-1 fees to market their shares.

Because of the funds short lifespans, the funds' issuers frequently use back tests to substitute for actual performance history, which uses historical data to arrive at a performance value. Thus, the issuers argue that if the UIT had existed in the past, this is how it would have performed. The problem with this misleading yardstick is that, as oft been said with investment strategies, the past is no indicator of future performance, and, often, the composition of the UIT is selected so that a high performance record can be constructed. Even the beginning and end dates for the historical record are selected to maximize the historical gains.