Unit investment trusts (UITs) provide investors with a unique investment opportunity by offering a fixed portfolio consisting of stocks and bonds in the form of redeemable units. Unlike mutual funds or exchange-traded funds, UITs are unincorporated and do not have a board of directors. In this article, we will explore the features, advantages, and considerations of investing in UITs.
UITs are structured as investment companies and issue units that represent a proportional interest in the underlying securities within the portfolio. These portfolios are typically fixed and have a specific investment objective, such as income generation or capital appreciation. Investors can purchase these units directly from the issuing company or through a brokerage account.
Marwest Apartment Real Estate Investment Trust (Marwest Apartment REIT) recently announced the issuance of deferred units to existing unit holders (TSXV: MAR.UN). This demonstrates one of the ways that UITs can offer flexibility and additional investment opportunities to unit holders.
Unlike mutual funds, UITs have a fixed maturity date. This means that the trust will terminate on a specified date, at which point the underlying securities are sold, and the proceeds are distributed to the unit holders. This feature provides investors with a clear exit strategy and allows for better long-term planning.
One of the key advantages of UITs is their diversification. By investing in a UIT, investors gain exposure to a range of different securities, reducing the risk associated with holding individual assets. This diversification can help mitigate potential losses and provide a more stable investment portfolio.
First Trust Advisors L.P. (FTA) recently announced the Board of Trustees' decision to merge three of its UITs, further enhancing the efficiency and potential returns of the trusts (September 29, 2023). This highlights the ongoing efforts of UIT issuers to optimize their offerings and provide value to investors.
UITs are designed to provide regular income to investors through interest and dividend payments from the underlying securities. This can be particularly attractive for individuals seeking a steady stream of income, such as retirees or those looking to supplement their current earnings.
Compared to open-end funds, UITs may offer a more cost-effective investment option. Since UITs have a fixed portfolio, there is no need for active management, resulting in lower management fees. This cost advantage can have a positive impact on investment returns over time.
Investing in UITs is not without risk. The value of the units can fluctuate based on the performance of the underlying securities. Additionally, UITs typically have limited liquidity, as they are not traded on an exchange like ETFs. Investors should carefully consider their investment goals and risk tolerance before investing in UITs.
For those interested in diversifying their investment portfolio and potentially earning attractive returns, UITs can be a valuable addition. By providing exposure to a fixed portfolio of stocks, bonds, and other assets, UITs offer investors the opportunity to participate in a well-balanced investment strategy.
