A unit investment trust (UIT) is a professionally selected pooled investment vehicle in which a portfolio of securities is selected by the sponsor and deposited into the trust for a specified period of time. Generally, a UIT’s portfolio is not actively traded and follows a buy and hold strategy. A unit investment trust is registered with the SEC as a Registered Investment Company (RIC) or Grantor trust. The portfolio remains fixed until the termination of the trust, usually ranging from 13 months to as much as 30 years, depending on the underlying securities. Although the securities within the trust remain generally fixed and are not managed, the sponsor may remove a security from the trust under limited circumstances. These situations are outlined in the prospectus.
The UIT is designed to follow an investment objective over a specified time period, although there is no guarantee that the objective will be met. UITs are created by a trust sponsor where several investment terms are set forth such as the trust objective, what securities are placed in the trust, when the trust will end, what fees and expenses will be charged, etc. These items are detailed in the prospectus. Some UITs follow rules-based stock selection strategies which have hypothetical performance records back over several decades; this information can help investors decide if the investment strategy might be appropriate for their objectives and goals. Keep in mind that hypothetical performance, like any past performance, does not guarantee future results, which will differ from past performance.
Raymond James wants to ensure that you are investing in the products that best suit your financial situation, investment objectives, risk tolerance, time horizon, diversification and liquidity needs. This guide will help you better understand the features, costs and risks associated with unit investment trusts (UITs).
There are primarily two categories of UITs: equity (stock) trusts and fixed-income (bond) trusts, which are described below. Within these categories, many trusts are available to suit a variety of investment objectives and risk levels, ranging from conservative to aggressive.
Strategy portfolios – seek to outperform a benchmark, such as a specific widely held index, using sound, fundamental screens that reflect the historical behavior of the securities.
Income portfolios – typically seek to provide dividend income and may also provide potential capital appreciation.
Asset allocation portfolios – invest in different asset classes, styles, capitalizations, designed to meet specific investment objectives to help better manage investors’ asset allocation needs.
Sector portfolios – invests in companies involved in a specific industry such as energy, health care, financial services or technology.
Tax-Free Fixed Income – invests in a pool of bonds that provide monthly or semiannual income exempt from federal income taxes, and in some cases, state income taxes.
Taxable Fixed Income – invests in pool of bonds that may include taxable Munis, corporate issues, or agency issues that provide monthly or semiannual income.
Read the Prospectus
UITs are sold by prospectus. The prospectus contains information you should consider, including the UITs investment objectives, risk, charges and expenses, and other information about the UIT. Your Financial Advisor can provide you with a prospectus for any UIT you may be considering. You should read it carefully before investing.
Some of the key features and characteristics associated with investing in UITs include the following:
Greater diversification. Since a UIT portfolio represents pro-rata ownership in a pool of securities, it provides a higher level of diversification than an investment in a single security. Please note, diversification does not ensure a profit or protect against a loss.
Daily liquidity. A UIT can be redeemed daily at net asset value (NAV), which may be more or less than the original purchase price.
Rebalancing opportunities. Studies have shown that rebalancing can provide benefits to your long-term investment plan. With UITs, rebalancing is simple. When the portfolio terminates, investors have the option to reinvest their proceeds, into a new, rebalanced portfolio. It is important to note that rebalancing may cause a taxable event unless units of the portfolio are purchased in an IRA or other qualified plan, and rebalancing does not ensure a profit or protect against a loss.
Discipline. Unlike actively managed funds, the securities in the portfolio remain fixed over the life of the investment.
No manager-driven style drift. Because a UIT is clearly defined and not actively managed, there will be no style drift as a result of manager-driven trading. There can be, however, changes to a trust’s style due to changes in market conditions and underlying securities.
In the case of equity-related securities, there are no embedded capital gains. Capital gains taxes are only paid if there is a profit at the time of UIT termination or liquidation.
UIT Disclosure Document
Please read the UIT disclosure document to learn more about UITs, cost of investing and how your Financial Advisor and Raymond James are compensated.
The UIT prospectus includes a fee table that lists the charges you pay. UIT investors may pay an initial sales charge, deferred sales charge, a creation and development fee and an annual trust-operating expense. The application of these charges may vary, depending on the sponsor, the length of the trust and whether the UIT is an equity trust or a fixed-income trust. In addition to the fees outlined in the prospectus, you may be assessed a processing or an administration fee for purchases and sales of unit investment trusts through Raymond James. Your Financial Advisor does not receive compensation from the ticket charge. Costs of investing in UITs within fee-based accounts are also described below.
Sales charges – These charges provide compensation for the UIT sponsor who creates and provides services throughout the life of the trust, Raymond James, and your Financial Advisor, who helps you select UITs to suit your investment objectives. Sales charges are classified as “initial” and “deferred.” The initial sales charge is paid at the time of purchase. The deferred sales charge is paid monthly from the trust assets. The amount and timing of the deferred sales charge, if applicable, varies by trust and sponsor. Upon redemption prior to the trust maturing, any outstanding deferred sales charges will be deducted. Please consult the fee table within the prospectus for specific information on sales charges.
Creation, development and organization fees – The trust sponsor receives these fees from the trust for creating and developing the trust and organizing and offering the portfolio. This fee is generally charged at the end of the initial offering period and is paid directly from trust assets.
Estimated annual trust-operating expenses – These charges typically pay for portfolio supervision, bookkeeping, administration, evaluation and various other operating expenses. They are paid from the trust assets.
Fee-based accounts – UITs may also be available for purchase through select fee-based or advisory accounts offered by Raymond James. Instead of paying the initial and deferred sales charges, clients in fee-based accounts pay a fee that is billed annually in advance and based on a percentage of the total value of the account’s eligible securities. Fee-based clients will still pay any Creation & Development (C&D) fee and any operational expenses incurred by the trust. Please ask your Financial Advisor about the availability of UITs in fee-based accounts.
Before you invest
Please ask your Financial Advisor about the product features, discounts and associate rules before investing in or rolling over proceeds of any UIT. A prospectus for any unit investment trust contains this and other information, and can be obtained by contacting your Financial Advisor. Read it carefully before you invest.
Overall Risks: Generally speaking, unit investment trusts will inherit the risks of the underlying securities, and are not appropriate for investors seeking capital preservation. There is no assurance that an individual UIT portfolio will meet its objective. UITs are not actively managed and will not be sold to take advantage of market conditions. Upon termination there is no assurance the value of the UIT will be equal to or higher than the original price. The level and type of risk associated with UITs may vary significantly from one trust to another. It is important to have a complete understanding of the underlying products from which a UIT derives its value to evaluate the risks. In general, complex UITs are subject to a number of risks that include increased volatility and greater potential for loss, and are not suitable for all investors. The investment strategies and risks of each UIT are fully outlined in the trust’s prospectus.
Equity UITs: have risks common to owning individual stocks, which may include but are not limited to perceptions of the financial stability of the issuers, the condition of the stock market and/or sector, political and economic events, and rising interest rates.
Fixed Income UITs: have risks common to owning individual bonds which may include, but are not limited to interest rate risk, default or credit risk, liquidity risk, early call provisions, volatility and if the underlying bonds are insured, insurance risk is based on the insurer’s ability to repay interest and/or principal upon default.
Unit holders are subject to taxes on their investments. Investors may realize a taxable gain or loss on their federal tax returns if units are redeemed at or prior to the termination of the trust. Dividends, interest and/or capital distributions are also subject to taxes. Dividends will fluctuate and are not guaranteed. If the unit holder elects to reinvest redemption proceeds into another UIT, it is considered a taxable event, and the unit holder will realize any gain or loss and wash sale provisions may apply. For more information regarding alternative minimum tax, nonresident aliens, or state or foreign withholdings, please read the prospectus and/or contact a tax advisor or attorney.
Both Regulated Investment Company (RIC) and Grantor structures are subject to reclassification. Reclassification is income and/or principal received by the trust and distributed to unit holders. After year-end, issuers will adjust (reclassify) declarations of income paid during the previous tax year. It can generally be reclassified as qualified dividend income, return of capital, long-term capital gain or short-term capital gain. Because the reclassification could result in a more beneficial taxable event for unit holders, it is important to take this into consideration when planning the timing of when you file your taxes. You should consult your tax advisor prior to making any such investment decision.
For IRA and other tax-deferred accounts, taxes on capital gains and income received are deferred until distributions are made.
To learn more about unit investment trusts, ask your Financial Advisor or visit the following Web sites:
Financial Industry Regulatory Authority
Securities and Exchange Commission
Securities Industry and Financial Markets Association
Investment Company Institute
Since UITs have a fixed time horizon, investors at termination can elect to use the proceeds of the terminating trust to purchase a new UIT or the proceeds will be credited into the investor’s account at the net asset value. Prior to the trust’s termination, investors may sell/redeem their UIT shares at the NAV less any deferred sales charges. The proceeds from the sale will be credited to the investor’s account in three business days after the sale (Trade Date +2). Also, under limited circumstances certain trusts allow investors to elect to receive their pro-rata shares in-kind but this may create a taxable event.
If you sell prior to maturity, please be advised that you will pay the full sales charges as though you held the investment until maturity.
Investors should consider the investment objectives, risks, and charges and expenses of unit investment trusts carefully before investing. The prospectus contains this and other information about unit investment trusts. The prospectus is available from your financial advisor and should be read carefully before investing.