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A"unit investment trust," commonly referred
to as a "UIT," is one of three basic
types of investment company. The other two types
are mutual funds and closed-end funds. A unit
investment trust (UIT) is a fixed portfolio of
professionally selected securities. Investors
purchase units which represent an undivided ownership
in the entire portfolio. Unlike mutual funds,
which continually buy and sell securities, a UIT
portfolio is fixed at date of deposit, so the
investor knows exactly what securities are initially
in the portfolio, when the trust is scheduled
to mature, and what income stream the trust is
expected to generate. UITs may be best suited
for investors with a defined investment goal,
who seek opportunities to make creating a portfolio
simpler. UITs can offer a lower minimum entry
point and help investors gain a diversified position
in a concentrated segment of either the credit
or equities market.
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Here
are some of the traditional and distinguishing
characteristics of UITs:
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A UIT typically issues redeemable securities (or
"units"), like a mutual fund, which
means that the UIT will buy back an investor’s
"units," at the investor’s request,
at their approximate net asset value (or NAV)
. Some exchange-traded funds (ETFs) are structured
as UITs. Under SEC exemptive orders, shares of
ETFs are only redeemable in very large blocks
(blocks of 50,000 shares, for example) and are
traded on a secondary market.
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A UIT typically will make a one-time "public
offering" of only a specific, fixed number
of units (like closed-end funds). Many UIT sponsors,
however, will maintain a secondary market that
allows owners of UIT units to sell them back to
the sponsors and allows other investors to buy
UIT units from the sponsors.
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A UIT will have a termination date (a date when
the UIT will terminate and dissolve) that is
established when the UIT is created (although
some may terminate more than fifty years after
they are created). In the case of a UIT investing
in bonds, for example, the termination date
may be determined by the maturity date of the
bond investments. When a UIT terminates, any
remaining investment portfolio securities are
sold and the proceeds are paid to the investors.
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A UIT does not actively trade its investment
portfolio. That is, a UIT buys a relatively
fixed portfolio of securities (for example,
five, ten, or twenty specific stocks or bonds),
and holds them with little or no change for
the life of the UIT. Because the investment
portfolio of a UIT generally is fixed, investors
know more or less what they are investing in
for the duration of their investment. Investors
will find the portfolio securities held by the
UIT listed in its prospectus.
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A UIT does not have a board of directors, corporate
officers, or an investment adviser to render
advice during the life of the trust.
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UITs are regulated primarily under the Investment
Company Act of 1940 and the rules adopted under
that Act, in particular Section 4 and Section
26.
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Typically, there are three 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-free fixed income - Portfolios
of municipal bonds that provide monthly or semi-annual
tax-free income.
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• Equities - Portfolios of equity securities
that provide potential for capital appreciation
and/or income.
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