Buying Unit Investment Trust

In some cases, I feel better buying Unit Investment Trust simply because I know what I am getting. A Unit Investment Trust (UIT) is a US investment company offering a fixed (unmanaged) portfolio of securities having a limited life span. UITs are assembled by a sponsor and sold through brokers to investors. A UIT portfolio may contain one of several different types of securities. The two main types are stock trusts (equity) and bond trusts (fixed income).

Unlike a mutual fund, a UIT is created for a specific length of time and is a fixed portfolio, meaning that the UIT’s securities will not be sold or new ones bought, except in certain limited situations. The exception may be when a company is filing for bankruptcy or the sale is required due to a merger.

Stock trusts are generally designed to provide capital appreciation and/or dividend income. They usually issue as many units (shares) as necessary for a set period of time before their primary offering period closes. Equity trusts have a set termination date, on which the trust liquidates and distributes its net asset value as proceeds to the unit holders. The unit holders may then have special options for the reinvestment of this principal.

Bond trusts issue a set number of units, and when they are all sold to investors, the trust's primary offering period is closed. Bond trusts pay monthly income, often in relatively consistent amounts, until the first bond in the trust is called or matures. When this occurs, the funds from the redemption are distributed to the clients via a pro rata return of principal. The trust then continues paying the new monthly income amount until the next bond is redeemed. This continues until all the bonds have been liquidated out of the trust. Bond trusts are generally appropriate for clients seeking current income and stability of principal.

A UIT may be constituted as either a regulated investment company (RIC) or a grantor trust. A RIC is a trust, corporation or partnership in which investors have common investment and voting rights but do not have direct interest in investments of the Investment Company or fund. A grantor trust, in contrast, grants investors proportional ownership in the underlying securities.
A UIT is created by a document called the Trust Indenture. This document is drafted by the Sponsor of the fund, and names the Trustee and the Evaluator. By US law, the Sponsor and the Trustee may not be the same. The sponsor selects and assembles the securities to be included in the fund. The trustee keeps the securities, maintains unit holder records, and performs all accounting and tax reporting for the portfolio. The largest issuer of UITs is First Trust Portfolios. Other sponsors include Van Kampen, Millington Securities, Advisors Asset Management, Inc. and Guggenheim Funds. Most large brokerage firms such as Merrill Lynch and A. G. Edwards sell UITs created by these sponsors.

From a tax perspective, UIT's offer a shelter from the unrealized capital gains taxes typical inside of a mutual fund. Because individual UIT's are assembled and purchased for specific periods of time, the cost basis consists of the initial purchase price of the securities held in the trust. A mutual fund on the other hand, taxes the individual based on the entire previous tax year regardless of the date purchased. An investor could, for example, purchase a mutual fund in October, absorb a loss during the last quarter of the year, and yet still be taxed on capital gains within the fund depending on the overall performance of the underlying securities from January 1 of the current year. A UIT avoids this potential tax consequence by assembling an entirely new "fund" for each individual investor.

Some exchange-traded funds (ETFs) are technically classified as UITs: however, ETFs usually do not have set portfolios. They are either managed or update automatically to follow an index and they do not have defined lives.

If you are interested in exploring UITs, see your broker for a list of these trusts.

Where Do We Stand at Year End?

The NYSE Bond Market's last day of trading was December 30, 2010. So we are taking the figures from the last trading day for bonds. As you know, I mainly invest in Junk or Non-investment Grade Corporate Bonds. My IRA Portfolio increased in value by 25.7% in the last 12 months.

At the same time, the Dow Jones Industrial Average gained 10.95%. That is the best gain in years for the Stock Market.

Since January 30, 2009, my IRA Portfolio increased by 78.46%. I expect my portfolio to double in less than three years or before January 30, 2012.

Who is reading the blog?

For 2010, the people in countries that read my blog from high to low are in these countries;

1) United States
2) South Korea
3) Russia
4) Canada
5) Ukraine
6) Chile
7) Hungary
8) China
9) Denmark
10) United Kingdom