Three Main Uses Provides Income Capital Appreciation Tax Deferred Savings

What is it?
A registered trust in which a fixed portfolio of income-producing securities are purchased and held to maturity. UITs usually hold a large amount of municipal bonds but may also consist of government bonds, corporate bonds, or even common stocks. Common stock is held in a "stock trust" that mainly relies on dividends and capital appreciation of stock prices to make money. Examples of a variation of stock trusts are "diamonds" and "SPDRS" that attempt to track the performance of the major market indexes. Investors receive interest (or dividends) on the bonds (or stocks) held within the UIT, this interest is proportionate to the amount they invested into the trust.

UITs are sort of like a mutual fund, but once the UIT selects the securities it will hold them, the portfolio is not managed like mutual funds are. It is not until the bonds held in the UIT mature that the trust is dissolved.

Objectives and Risks:
Their steady and predictable income stream makes bond UITs very popular with retirees looking for income supplement. One risk is that because the interest on the UIT is fixed for the life of the security it makes them more susceptible to inflation. For the most part UITs are fairly low risk investments, but stock UITs heavily depend on the performance of the stock market, and there is no certainty of return in a stock trust like there is in a bond trust.

How to Buy or Sell it:
Most UITs usually can not be purchased through traditional brokers. Instead they can be bought through some insurance companies or financial advisors/planners. Each unit typically costs $1,000 and is sold by brokers to investors and they can be resold in the secondary market. There is usually a sales fee you pay when purchasing the UIT, therefore these don't make good short term investments.

Strengths:

UITs are very well diversified. if your goal is to provide income you can buy a bond trust, or if you want capital appreciation then you can buy a stock trust.

Weaknesses:

because the interest payments are fixed, holding a UIT for a long time could undermine performance. depending on the type of UIT, they can sometimes be difficult to sell quickly.

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