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Rating and Performance of Unit Investment Trusts

written by: Tim Plaehn•edited by: Jason C. Chavis•updated: 11/22/2010

Price and performance for unit investment trusts is not widely available when compared to mutual funds and ETFs. A method of rating unit investment trusts allows an investor to gauge the return potential

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    Unit Investment Trusts: Another Type of Fund Investment

    Unit investment trusts -- UITs -- are strictly broker sold products and there is not an active secondary market for the units. The low visibility of UIT returns makes the rating of unit investment trusts difficult. Fortunately, the structure and function of unit trusts makes evaluating them pretty straight forward.

    Like mutual funds, unit investment trusts offer investors an investment into a portfolio of securities in a single product. The major difference from mutual funds is that, once a UIT portfolio is set, the securities in the portfolio do not change. Also, most UITs have a termination date when the securities will be sold and the proceeds distributed to the unit holders. These features make it easier to analyze the performance of unit investment trusts.

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    Function and Types of Unit Investment Trusts

    Unit investment trusts are formed when a trust sponsor puts together a portfolio of securities and then offers share units of the trust through brokers and investment houses. The UIT portfolio holds the initial securities until the termination date of the trust. Some features of UITs are:

    • Monthly dividend payments from bond UITs.
    • Automatic reinvestment of dividends into more units if desired.
    • Trust sponsor will buy back shares at the current net asset value if a investor wants to sell.

    Traditionally, unit trusts held taxable or municipal bonds. Investors receive an investment in a portfolio of bonds with monthly dividends and a set maturity date. The Investment Company Institute reports that the growth area for UITs has been equity trusts holding stocks. Most equity UITs have portfolios to match a broad or sector stock index or to mirror a specific investing strategy.

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    Evaluating Unit Investment Trusts

    Investors should look at UITs as buy-and-hold investments. The trusts are put together to exist for a specific time period and that should be the time frame for unit buyers. A main feature is that the portfolio of a UIT is professionally selected to meet the objectives of the trust. In the bond market especially, it is difficult for investors to evaluate the relative creditworthiness and yield of individual bonds.

    Fixed income UITs will hold a portfolio of either taxable or tax-free municipal bonds. Each trust will own bonds all of a similar maturity. This means the trust will be dissolved when the bonds mature, ensuring a certain level of payoff to the trust investors. The UIT prospectus will provide an estimated current return and an estimated long term return. The current yield will be the monthly dividend rate paid to investors. The long term return is similar to a bond's yield to maturity and takes into effect the expected payout amount when the units mature. If there are no defaults in the UIT bond portfolio, these return rates are what investors will earn if they hold trust units for the full term of the trust. The fixed term feature of bond UITs provide a more stable future value than an open ended bond mutual fund.

    Equity UITs will provide the performance of a buy-and-hold stock portfolio. The stock selection strategy should provide a compelling case for buying the UIT over a lower cost stock index fund or ETF. Equity UITs may be a better deal for the broker who collects a nice commission and gets to do it again when the trust matures, sometimes in just a year or two.

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    Investment Company Institute Guide to Unit Investment Trusts: