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-- Posted: Nov. 8, 2000

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 an anachronism.

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.

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Equity UITs

  • 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 and energy.

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.

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