What in the world
is a UIT?
A Unit Investment Trust, known in the trade as UIT,
is a trust with a lot of fixed elements.
It's made up of a fixed portfolio
of stocks or bonds, which is to say that nothing gets added
and almost nothing gets sold.
The portfolio is divided into
a fixed number of units to be sold to a fixed number of investors.
It expires on a fixed date
and gets liquidated at maturity.
Once it's set up, the trust is basically an unmanaged
portfolio. Generally, bond-UITs expire in 10 to 30 years and stock
UITs in one to five years.
UITs started out as diversified, tax-free bond portfolios
targeted at conservative investors who wanted a sure, steady stream
of income without worrying about fluctuating interest rates. However,
today's bond yields aren't high enough to support the typical UIT's
4 percent to 5 percent commission, so bond UITs are fast becoming
But never underestimate the creativity of those financial
folks -- they make nice money on UITs. Rather than bow out, they've
stocked them with equities instead of bonds and are aggressively
marketing them to individual equity investors.
- Spiders mimic an S&P index. It's the
popular name for SPDR, or Standard & Poor's Depositary Receipt.
There's a large-cap Spider that tracks the S&P 500 and a mid-cap
Spider that tracks the Standard & Poor's MidCap 400.
- Diamonds are made up of the 30 stocks in
the Dow Jones Industrial Average.
- Webs, or the World Equity Benchmark Series,
track the Morgan Stanley Capital International country indexes.
- And there are odds and ends. Large brokerage
houses such as Van
Kampen and Merrill
Lynch have a myriad of sector UITs including technology, biotechnology
Loads and fees in equity UITs
Management and maintenance fees are low because the
equities in the UITs are basically fixed and unmanaged. However,
an equity UIT's load is typically around 2.5 percent. That seriously
cuts into its return, especially if the UIT expires in a year. Twelve
months is a short time to amortize any load. And, since they expire
in so short a period, unless your UIT is tax-deferred, you're
looking at capital gains every time you blink your eye.
Dorothy recommends investigating no-load mutual funds
before plunking down money for a UIT.
-- Posted: Nov. 8, 2000