Unit investment trusts

Unit investment trust (UITs)

Unit investment trusts (UITs) collect money from investors and invest those assets to create fixed portfolios of securities. Like all other investment companies, UITs aim to maximize investor returns while adhering to the stated investment objective.

UITs are required to be registered with the Securities and Exchange Commission (SEC). Part of the registration process requires a prospectus to be created and made available to investors. This disclosure document includes the following:

• The investment objective
• Investor fees
• Related risks

The issuer, sometimes called the trust sponsor, registers the UIT and typically picks the investments for its portfolio. The prospectus includes guidelines for the trust sponsor to follow. For example:

“The trust sponsor will only consider investments in speculative grade corporate debt securities”

To better understand how this security works, the Guggenheim Balanced Income Builder Portfolio. First, here’s a link to this UIT’s prospectus. Let’s quote the overview (page 2):

Guggenheim Defined Portfolios, Series 2308 is a unit investment trust … Guggenheim Funds Distributors, LLC serves as the sponsor of the trust.

The trust is scheduled to terminate in approximately two years.

UITs always maintain a maturity date; in this case, the UIT will liquidate after two years. The inception date is April 20th, 2023, and the maturity date is April 21st, 2025. At or just before the inception date, Guggenheim will build a portfolio of securities that generally stays fixed. This particular UIT invests in dividend-paying common stocks and fixed income-based exchange traded funds (ETFs). These security types pay dividend income, which is passed through to UIT investors monthly.

Once the portfolio is set, it generally remains fixed. The trust sponsor may be granted some ability to take action in the portfolio if an extraordinary event occurs. However, most UIT assets are set and stay unchanged until the liquidation date. Therefore, UITs do not assess management fees. They do impose sales charges, operating expenses, and creation & development (C&D) fees. C&D fees compensate the trust sponsor for establishing the investment objective and creating the UIT portfolio. For reference, Guggenheim Balanced Income Builder Portfolio’s fee table is on page 10 of the prospectus.

UIT investors have two general choices while holding their investment. They can hold the UIT to maturity, the date the trust sponsor liquidates the portfolio* and distributes the proceeds to investors. Conversely, investors can redeem their units at their current net asset value (NAV) with the issuer before maturity. Either way, the payment received by the investor represents the current market value of the securities held in the UIT portfolio.

*Some UITs allow “in-kind” distributions, which send investors their share of the securities in the portfolio. For example, assume a UIT is comprised of 10 separate shares of stock worth a total market value of $1,000. An in-kind distribution would provide the investor the 10 shares of stock held in the portfolio instead of liquidating the shares.

Comparison to mutual funds

Test questions may compare and contrast UITs and mutual funds. While they share characteristics, there are some key differences.

UIT & mutual fund similarities

• Registered investment companies
• Prospectus provides key disclosures
• Redeemable with the issuer

*UIT & mutual fund differences

• UITs may trade in the secondary market
  • Mutual funds are only redeemable (no secondary market)
• UITs maintain fixed portfolios
  • Mutual fund portfolios are managed*
• UITs have no management fee
  • Virtually all mutual funds have management fees

*Even index funds involve trading securities in their portfolio, as indexes change over time. For example, the S&P 500 typically drops and replaces 20-25 stocks annually.