Unit Investment Trusts (UITs)

Management companies are one type of registered investment company. Unit Investment Trusts are another. The Investment Company Act of 1940 defines a Unit Investment Trust (UIT) as:

an investment company which (A) is organized under a trust indenture, contract of custodianship or agency, or similar instrument, (B) does not have a board of directors, and (C) issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities; but does not include a voting trust.

The main differences between management companies and UITs include the fact that UITs do not trade their portfolio, do not therefore have an investment adviser, and do not have a board of directors. A UIT is a "supervised, unmanaged investment company," because while the portfolio is supervised by a trustee, the securities in it are not traded by an investment adviser the way most management companies would actively manage their assets. Running the trust does involve fees for bookkeeping, trustee fees, administrative fees, etc., but again no management fees are charged.

When the shares are purchased an upfront sales charge is often added, or a deferred sales charge is imposed when the unit holder redeems.

Like a closed-end fund, a finite number of shares are offered to investors on the primary market. But, unlike, a closed-end fund, unit investment trust interests are redeemable as opposed to having to be traded at prices based on supply and demand. Also, unlike both open- and closed-end funds, unit investment trusts have a termination date, which means they have a limited duration. On the termination date, everything is liquidated, unit holders are paid out, and that's that.


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