4.1. WHAT IS A UNIT INVESTMENT TRUST(UIT) AND HOW DOES IT WORK?

A unit investment trust (UIT) is an investment company that offers a fixed portfolio consisting of stocks, bonds, and other investments as redeemable units to investors for a fixed period. The specific goals of UITs vary, but they are usually designed to provide capital appreciation and/or income from dividends and interest. You can buy a trust’s portfolio of various securities with a single transaction and purchase price. Generally, the minimum investment in a UIT is $1,000, but the amount can often be lowered if purchased for an Individual Retirement Account (IRA). A UIT is registered with the Securities Exchange Commission (SEC) as an investment company or grant trust.

A UIT’s portfolio usually follows a buy-and-hold strategy. Using this passive investment strategy, an investor buys a security and holds it, regardless of fluctuations in the market, expecting an increase in value over time. An investor, who is also called unitholder, buys the units created in the fund in return for dividends and interest payments. The investments made by a UIT determine the termination date as stated in the prospectus, but some UITs may terminate early under certain circumstances such as a merger or bankruptcy proceeding. The length of the investment varies based on both the investment’s objectives and the type of securities held. For example, a UIT with investments in bonds or other fixed income securities could be for an extended period, ranging from five to 30 years, but an investment in equities with a capital appreciation target could be as short as a year.

Although the major types of UITs include equity and fixed income, UITs also invest in exchange-traded funds (ETFs), CEFs, real-estate investment trusts (REITs), business development companies (BDCs), and other investments. Typically, at the end of the predetermined period, a UIT terminates. The securities in the portfolio are sold and the funds are returned to unitholders or rolled to another UIT. UITs are usually issued in successive series. UIT sponsors tend to offer a new series of UITs that coincides with the termination of a prior series, allowing you to invest in a new UIT with a similar objective.

4.2. WHO ORGANIZES UITS? WHO ARE THE KEY PARTICIPANTS? WHAT ARE THEIR ROLES?

SEC-registered investment banks, called sponsors or depositors, organize UITs. A sponsor creates a portfolio of marketable securities and deposits them with a trustee. In return, the sponsor receives unit certificates representing shares of ownership. UITs are typically organized as a single trust or a series of trusts. Each trust represents a different portfolio. The advantage of having a series of trusts is that a UIT can sell units of various portfolios without registering a new trust each time. UITs are designed to be held for the fund’s life with a known termination date, but many UITs are publicly traded offering you an opportunity to sell your shares early if your investment goals change.

A UIT involves four key participants: a sponsor, trustee, evaluator, and supervisor.

• Sponsor. A sponsor organizes UITs and pays for the initial organizational costs. Sponsors are SEC-registered broker-dealers and create a portfolio of marketable securities (underwriter). They also set a UIT’s objectives and buy securities for the portfolio (accumulator). Sponsors receive compensation for their services in the form of sales charges. Sponsors are also responsible for maintaining unitholder records and instructing the trustee for the sale of securities to meet redemptions requests.
• Trustee. A trustee provides several services, including collecting and distributing the dividends and interest payments to unitholders, maintaining the trust’s recordkeeping, and meeting the reporting requirements. The trustee also acts as a custodian in holding securities in trust upon instructions from the sponsor and provides unitholders with annual reports. A trustee receives compensation based on the UIT’s total value.
• Evaluator. An evaluator values the portfolio’s securities daily during the initial offering period and as needed thereafter. The sponsor uses this valuation to determine the unit’s offer price. The sponsor typically pays an evaluator, who is often an affiliate of the sponsor, and receives a fixed annual compensation for the services or a fee per evaluation.
• Supervisor. Although not required, some UITs also have a supervisor, who monitors the securities in the portfolio and advises sponsors on actions that might be needed.

4.3. WHAT ARE SOME FEATURES OF UITS?

UITs include the following key features:

• Diversification. Buying a UIT unit represents ownership of a certain percentage of the fund’s value. UITs hold various assets that provide diversification benefits. For individual investors, achieving similar diversification may require considerable capital and time commitment. As a result, you may have difficulty constructing a portfolio of various securities that is as diversified as a UIT portfolio.
• Defined portfolio. Although other PIVs such as actively managed mutual funds continuously alter their investment mix by buying and selling securities, UITs have a fixed portfolio of holdings.
• Defined lifespan. The investment holdings of UITs have a predetermined lifespan that typically ranges from 12 to 24 months but can extend to 30 years. The defined maturity allows you to align your investment objectives with those of a UIT. Again, you can receive the cash from a maturing trust and invest it in another one that aligns with your investment objectives.
• Variety. UITs are available that offer different risk and return opportunities such as equity and fixed income, including municipal bonds, corporate bonds, and government bonds.
• No-cash holdings. UITs generally invest all their available funds and don’t hold cash balances. An advantage of this policy is that it can improve portfolio performance because holding cash doesn’t earn a return.
• Income potential and distribution. UITs can provide regular income as often as monthly. By contrast, investors in fixed income securities receive interest less frequently, such as semi-annually or annually, and those holding dividend paying stocks receive dividends quarterly or annually.
• Flexible reinvestment options: You can opt to have distributions reinvested in additional units with no or a low sales charge.

4.4. HOW DO MUTUAL FUNDS, ETFS, CEFS, AND UITS DIFFER?

Although UITs are similar to other PIVs such as mutual funds, ETFs, and CEFs in various ways, such as being designed for small investors and providing diversification, they have several distinctive features. Table 1 provides a comparison of the features of these four PIVs.

• Defined portfolio. Although some other PIVs buy and sell securities continually, such as an actively managed mutual fund, a UIT’s security holdings remain fixed for the length of the holding period. This feature provides transparency because knowing a portfolio’s holdings allows you to manage your exposure accordingly. UITs also tend to have fewer underlying holdings than a typical mutual fund.
• Defined lifespan. The product structure differs among these four PIVs. Although mutual funds, ETFs, and CEFs don’t expire or mature, UITs are designed to end after a specific period. Thus, you can align a UIT’s defined maturity with your investment horizon.
• Structure and governance. UITs don’t have a board of directors to oversee the trust’s operations. The portfolio is not managed but instead it is supervised by the sponsor. Because UITs don’t have an investment advisor, certain sections of the Investment Company Act of 1940 don’t apply, including contracting with the advisor, governing of company’s board of directors, and conducting transactions with the affiliates. Moreover, unlike mutual funds, UITs must file a Form N-Q quarterly for a quarterly schedule of portfolio holdings and a Form N-PX annually for a proxy voting record with the SEC and can issue only voting stock.
• Way of issuing units. A UIT is offered to the public through an initial public offering (IPO). By contrast, mutual funds continually offer shares to investors until the fund manager can’t effectively handle managing more funds. If the demand for a UIT surpasses the quantity offered, the investment company can issue another series of the UIT.
• Fee structure. The fee structure may differ among PIVs. For example, although both UITs and mutual funds have operating fees to cover their asset management and marketing costs, UITs charge creation and development fees in addition to deferred sales charges.

4.5. WHAT ADVANTAGES DO UITS OFFER INVESTORS?

Owning UITs offers the following advantages for investors with limited capital.

• Diversification. Buying a UIT unit represents ownership of a certain percentage of the trust. UITs are classified by investment objectives and risk tolerance. They diversify their holdings by investing in various stocks, bonds, and other securities. Individual investors trying to form a portfolio as diversified as a UIT could incur substantial costs.

  Diversify. In stocks and bonds, as in much else, there is safety in numbers.

  Sir John Templeton

• Professional selection. Full-time, high-level investment professionals may be able to select securities included in a UIT better than the typical individual investor for a given investment objective, such as income, growth, or capital gains.
• Flexibility. Investing in UITs allows you to automatically reinvest distributions of principal and periodic payments into another UIT. Some UITs also permit you to exchange your units for another UIT. Thus, you can switch to different investment objectives or adjust to changing market conditions.
• Selection opportunities. UITs allow the pooling of funds and hence an opportunity to invest a wide range of assets beyond equity and fixed income securities that may be infeasible for individual investors given that some may require minimum investments. For example, some UITs may invest in alternative investments, such as commodities, foreign currencies, and derivatives. Some UITs invest across different market sectors, thus reducing investment risk. They also provide an opportunity to invest in overseas markets at a lower transaction cost than you would incur as an individual investor.
• Low expense ratio. UITs are attractive because they offer convenience, liquidity, and diversification at an affordable price. Because UITs don’t have investment advisors, you don’t have to pay annual management fees. Furthermore, UITs usually have fixed portfolios that don’t require frequent trading resulting in lower brokerage commissions and lower expense ratios.
• Transparency. The diversified holdings of a UIT usually remain fixed so that you know the securities held in the portfolio. Furthermore, a known lifespan enables you to select UITs to meet your investment horizon.
• Tax efficiency. UITs are tax efficient and can provide exemptions on capital gains and interest income. They protect you from the unwelcome year-end capital gains distributions that could result in a tax liability. Given that UITs are passively managed, they don’t realize gains from sales during the year to be distributed at year-end.
• Discipline. Unlike actively managed funds, the portfolios of UITs typically remain unchanged during the investment’s lifespan and offer relatively predictable returns. UITs also don’t experience manager-driven style drift resulting from managers making trades.

4.6. WHAT DISADVANTAGES OR DRAWBACKS DO UITS HAVE?

Although UITs offer some attractive features, they have several disadvantages.

• Market risk. Like other investments, UITs may not achieve their investment objectives. UITs are subject to market risk, sometimes called systematic risk, which is the possibility of a decline in an investment’s value due to changes in market factors. The value of securities in the portfolio may fluctuate as a result of macroeconomic events, fluctuating interest rates, changes in regulations and government policies, and both sector- and firm-related factors.
• Self-liquidating portfolios. When the trust matures, the investment terminates and you have the following choices:

  – receive cash for your proportional share of the UIT;

  – roll over the units to another trust at a low cost; or

  – receive an in-kind distribution, which is a payment made in the form of securities or other property in the trust rather than in cash.

Thus, the self-liquidating or fixed-term nature of UITs is a disadvantage of owning this PIV.

• Unmanaged portfolios. UITs are passively managed because the portfolio in each trust is intended to remain static throughout the investment period. Having no changes in holdings can be an advantage if those investments perform well, but if they drop in value you may lose money. Thus, UITs typically don’t act in response to anticipated market declines or the development of unfavorable events even if such decisions may be warranted.

  In investing, what is comfortable is rarely profitable.

  Robert Arnott

• Lack of investor control. Investing in a UIT takes away your control over choices of individual securities that go into the fund. You may want to invest in UITs if you believe in the soundness of passive management.
• Fees. You typically incur a one-time organizational cost, which is called a creation and development fee, and annual expenses, such as trustee and supervisory fees. Some UITs also have a front-end sales charge that investors pay immediately. Standard UITs charge a deferred sales charge ranging between 1.0% and 3.0%, which is paid in monthly installments over the UIT’s life. With these expenses, a UIT can be an expensive investment vehicle.
• Interest rate and credit risk. UITs often invest in bonds and other fixed income securities, which subject them to both interest rate and credit risk. Interest rate risk is the inverse relation between changes in interest rates and an investment’s value. For example, an increase in the interest rate is associated with a decline in a bond’s market value. Securities with longer-term maturities are subject to more interest rate risk than those with shorter-term maturities. Credit risk is the risk of default on a debt that results from a borrower failing to make required payments.
• Securities selection risk. Because UITs aren’t actively managed and securities included in their portfolios don’t change over time, their success depends on the trust’s investment strategies and the sponsor’s investment decisions. The strategies may be out of favor over time, and hence UITs may underperform comparable investments. So, UIT returns are mainly determined by the performance of the initially selected securities.

4.7. WHAT ARE THE MAJOR TYPES OF UITS?

Although many different types of UITs are available with various risk and return profiles, the two major categories are fixed income trusts and equity trusts.

• Tax-exempt municipal bond UITs. This type of UIT invests in bonds that are issued by municipalities or states to fund public projects such as highways, bridges, and hospitals.
• Taxable bond UITs. This category includes UITs that invest in corporate bonds, government bonds, and mortgage-backed securities.

  – Corporate unit UITs. This kind of UIT invests in bonds issued by corporations. The objective is to obtain a high level of income with minimum risk. Some of these UITs are insured to guarantee timely payments of interest and principal. Uninsured UITs tend to invest in high-grade bonds.

  – International bond UITs. These UITs hold bonds issued by foreign companies or governments. They are subject to foreign exchange risk as the trusts are denominated in foreign currencies. Foreign exchange or currency risk describes the risk that an investment’s value may change due to changes in the value of two different currencies. In other words, by investing in an international bond UIT, you are also investing in the foreign currency in which the bonds are denominated. If the foreign currency appreciates, then the domestic return on the international bond increases.

  – Mortgage-backed securities UITs. These UITs invest in mortgages backed by the Government National Mortgage Association (Ginnie Mae) or Federal Home Loan Mortgage Corporation (Freddie Mac).

  – US government securities UITs. This category of UIT invests in short- or long-term government securities such as US Treasury bills, notes, and bonds.

• Equity unit UITs. This type of UIT invests in domestic or international stocks. Equity UITs may include index trusts such as the S&P 500 index and sector trusts including energy and healthcare. They may also target specific investment approaches, including value, growth, and emerging market strategies.

  – A value investing strategy involves investing in undervalued securities.

  – A growth strategy focuses on capital appreciation by investing in companies with above average growth.

  – An emerging market strategy involves investing in securities in countries classified as an emerging market, which offers potentially higher returns and risks than securities in countries with developed markets.

4.8. WHAT SELECTION CRITERIA SHOULD INVESTORS CONSIDER BEFORE BUYING A UIT?

You should consider various factors before investing in UITs.

• Investment objective. You should make sure that your investment objectives are aligned with that of a specific UIT. UITs invest in different asset classes, industry sectors, and geographic areas due to their different objectives.

  It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.

  George Soros

• Expense ratio. You should focus on UITs that have low expense ratios.
• Risk preferences. Your risk tolerance or risk appetite determines how much risk to bear. For example, a portfolio consisting of AAA-rated bonds, which are considered the highest investment grade, is likely to be suited for an investor who is concerned with default risk because such bonds historically have extremely low default rates. Such factors as age, investment objectives, income, and wealth influence your risk tolerance.
• Investment strategies. UITs achieve their stated investment objectives by implementing specific strategies. Some strategies involve investing in companies offering good value, while others invest in companies based on their future potential.
• Investment horizon. Your investment horizon is the period over which you expect to invest. It is an essential factor in determining the most appropriate type of investment. Your age partly affects your investment horizon. Younger investors normally have longer investment horizons than do older investors. Investments with higher potential returns tend to require longer investment horizons because their prices tend to fluctuate more. UITs have a predefined lifespan that you should match to your investment horizon.
• Fund manager experience. Although UITs don’t involve active portfolio management, you should consider the resources and managerial experience that a UIT offers. For example, the ability to select securities to perform in at least the intermediate term would be valuable. Furthermore, because a portfolio’s composition is static and usually doesn’t change during the unit’s lifespan, the fund manager’s experience is crucial for a UIT’s performance.
• Protection from inflation. To protect an investment from being eroded by inflation, UITs typically offer products producing returns above the inflation rate over the long term.
• Tax rate. If you live in a high-income tax state, you may want to consider investing in a single-state municipal UIT that holds only bonds from that state because the interest paid is generally exempt from federal, state, and local income taxes.

4.9. HOW CAN INVESTORS EVALUATE A UIT’S PERFORMANCE?

Evaluating UIT performance is relatively difficult compared to other PIVs such as mutual funds, ETFs, and CEFs because media outlets such as Morningstar or Thomson Reuters neither widely track nor report UIT performance. Conversely, sponsors may provide performance tracking for the trusts offered. With this limitation, you can use the following measures to track a UIT’s performance.

• Yield on bonds or stocks. Yield is a measure of the income that a bond or stock pays during a year divided by the investment amount. It is expressed as a percentage. For example, if you buy a bond for $1,000 and the annual interest payment you receive is $50, then the yield on your investment is $50/$1000 = 5%.
• Total return. A UIT’s performance can be measured by its total return, which is the change in the value of an investment plus income divided by the initial amount invested. Following the previous example, if you sell your bond one year later for $1,025, then your total return would be [($1,025 − $1000 + $50)/$1000] = 7.5%.
• Comparison with similar funds. Another approach to evaluating a UIT’s performance is to compare its total return to similar funds over the same period. For example, a bond trust can be compared to other funds with a similar maturity period or credit rating. Credit rating refers to an evaluation of a borrower’s ability to pay back the debt. For example, Moody’s rating, one of the major credit rating agencies, ranges from Aaa to C, with Aaa being the highest quality and C being the lowest quality.
• Other factors. You should also consider the following factors in evaluating a UIT’s performance.

  – Transaction fees. For accurate performance measures, you should deduct transaction fees from the total returns.

  – Taxes. You should consider the impact of taxes on performance on an after-tax basis. For example, income from some municipal bonds is tax-exempt. The return of a UIT investing in tax-exempt bonds is likely to be lower than on a taxable bond paying a higher interest rate. However, this analysis is an “apples and oranges” comparison because the two rates aren’t initially comparable. Therefore, you should calculate the returns on an equivalent before-tax basis to facilitate comparison of net interest income from both taxable and tax-exempt sources. For example, if you are in the 24% tax bracket and have a tax-free yield of 4%, then the taxable equivalent yield is computed by dividing the tax-free yield by (1–tax rate). So, the taxable equivalent yield is 4%/(1 − 0.24) = 5.26%.

  – Volume discount. UITs may offer a reduction in the sales charge with a larger volume purchase, which is similar to breakpoints used in mutual funds. Breakpoints are the investment levels at which any discounts become available. Volume discounts reduce the upfront charges based on the number of units purchased. Sales charge discounts usually apply to purchases by the same person on the same day and through the same brokerage firm. For example, if the maximum sales charge for a $50,000 investment is 2.95%, the sales charge for an investment above $1,000,000 could be about 1.40%.

  – Inflation. With long-term investments, inflation may substantially reduce returns. With inflation, your money loses value over time and has lower purchasing power. The rate that excludes inflation is called the real rate of return.

4.10. WHO SHOULD INVEST IN UITS?

UITs are most suitable for long-term investors who are looking for a cost-efficient investment such as ensuring a safe retirement. They are also attractive for novices and busy people who lack the knowledge and experience to properly diversify their investment portfolio. UITs are well suited for investors who have a defined investment horizon, such as paying for a child’s college education that matches the trust’s lifespan.

UITs would be a good investment vehicle if you have the following needs. UITs typically pursue specific investment objectives that would meet your needs in terms of a certain income stream and risk level. Also, the securities in the portfolio remain unchanged during the investment period and would be suitable if you prefer a passively managed portfolio. UITs are efficient investments because they are fully invested and don’t hold any cash. UITs allow reinvestment of any distribution to additional units with reduced or no charges. UITs are useful if you intend to follow a buy-and-hold strategy and receive interest income and reinvest dividends over a specified period. Typically, if you are a retiree or close to retirement, you would be a good candidate to invest in UITs, especially a bond trust or a high dividend paying equity trust.

4.11. HOW DO INVESTORS BUY, SELL, OR SWITCH UNITS OF A TRUST?

You can obtain UIT price quotes from brokerage firms that sell UITs. Some broker-dealers sponsoring UITs also sell trusts issued by other sponsors. Other UITs list their prices on NASDAQ’s Mutual Fund Quotation Service. A few publications, such as Barron’s, list prices weekly. You can also buy units of these trusts through their registered representatives and agents of smaller investment firms that sell trusts sponsored by third-party bond and brokerage firms.

You can buy UITs in two ways. First, a limited number of units are available through an IPO, which involves the sale of UIT units to first-time investors. Second, several trust sponsors maintain a secondary market in trust units, which is a market where investors can trade previously issued units. In the absence of a secondary market for a UIT, trusts are required to buy back (redeem) outstanding units at their net asset value (NAV), which may differ from the initial price paid. The NAV is based on the current market value of the underlying securities. The typical minimum investment in a UIT is 100 units or $1,000, but the minimums vary. UITs compute a daily NAV, allowing you to buy and sell at that value. Some plan sponsors allow unitholders to exchange their units for another UIT at a lower or reduced sales charge. Many UITs offer a 1 percentage point reduction in the sales charge if you invest using the proceeds from an earlier series of the same UIT. Typically, this discount is applied if the rollover takes place within 30 days of the redemption.

4.12. HOW ARE INDIVIDUAL SECURITIES CHOSEN FOR A TRUST?

The selection process is a function of the trust’s objectives and tends to change from one portfolio to another. UITs seek to select securities that have a high chance of achieving each portfolio’s investment objectives. For example, the objective of Guggenheim’s Global 100 Dividend Strategy Portfolio Series 14 (CGONNX) is to provide dividend income. Occasionally, a UIT may remove a security from a portfolio under certain circumstances, such as a substantial decline in a bond’s credit rating. In most cases, securities in a UIT remain fixed for the trust’s life, despite changes in the market value.

4.13. WHAT ARE THE REGISTRATION REQUIREMENTS FOR UITS?

UITs are subject to federal laws and oversight by the Securities and Exchange Commission (SEC). Besides being regulated by the same federal securities laws as other publicly offered investments under the Securities Act of 1933, UITs are also subject to the Investment Company Act of 1940. This federal statute governs the trust structure and its daily operations. UITs are required by law to provide a prospectus and disclose information about the trust, including its investment objectives, portfolio composition, sales charges and expenses, and terms for the buying and selling of units. Investors receive a prospectus with their confirmation of the sale when they invest in units through an IPO or the secondary market and an annual report from the trust. UIT annual reports contain financial statements, audited by the trust’s independent public accountants, and the trust management’s discussion of fund operations, investment results, and strategies. Additionally, a UIT or broker may provide statements that update and summarize individual account holdings and values.

4.14. HOW ARE UITS TAXED?

UIT unitholders are subject to taxes on their investments. You may have a taxable gain or loss on your federal tax returns if you redeem units on or before the trust’s termination. Most distributions are subject to taxes. Generally, unitholders must pay income taxes on the interest, dividends, and capital gains distributed to them. Taxes related to retirement accounts such as IRAs are deferred until distributions are taken from the account. Furthermore, some UITs provide income that is exempt from both federal and state taxes such as municipal bonds. If you invest in fixed income UITs, you should also be aware of the fund’s tax status, as it can be either taxable or tax-advantaged. In the United States, UITs provide Internal Revenue Service (IRS) Form 1099 to their unitholders annually to summarize the trust’s distributions. Also, when you sell units, you realize either a taxable gain or a loss that should be reported on income tax returns.

4.15. HOW DO UITS TRADE ON THE SECONDARY MARKET?

Although many investors buy units with the intention of holding them until the trust terminates, they can sell their units at any time. Even in the absence of a secondary market for UITs, trusts are required to redeem (buy back) outstanding units at their NAV, which is based upon the current market value of the underlying securities. With the existence of a secondary market, UIT owners can sell their units back to the sponsors allowing other investors to buy UIT units from the sponsors. Hence, this process helps UITs to avoid depleting their assets as UITs don’t have to redeem units. The NAV may differ from the price paid initially. If your investment objective changes, some UIT sponsors allow you to exchange your units for another UIT at a reduced sales charge. You can buy, sell, or exchange units on any business day at the current NAV after deducting any applicable sales charges.

4.16. WHAT CHOICES DO INVESTORS HAVE WHEN A TRUST MATURES?

You have several options when a trust matures, including redeeming the shares for cash, rolling over at a reduced sales charge, or exchanging with the underlying securities or assets (in-kind distributions).

• Cash liquidation. A UIT must issue redeemable shares, which gives you an option of presenting shares to the issuer to receive the proportional value of the UIT’s net assets. Issues can be redeemed for cash at their NAV computed daily. When the trust liquidates, you receive a cash distribution, which may be less than the unit’s value because of deferred sales charges.
• Rollover at a reduced sales charge. The sponsor offers you incentives to roll over your investment into a new series of the same trust or an identical or different unit investment offered by the sponsor by providing a reduced sales charge. This transaction is considered a taxable event and may require advanced notice to the trustee.
• In-kind delivery. In-kind delivery involves a proportional delivery of the underlying securities or assets rather than in cash. You may ask for an in-kind distribution of the securities to your brokerage account.

4.17. HOW ARE UITS REGULATED?

UITs are subject to various federal regulations, including the Securities Act of 1933 as a publicly offered investment and the Investment Act Company of 1940. The US SEC oversees UITs. Regulations require that UITs provide unitholders with annual reports that include the unit’s audited financial statements and management’s discussion of strategies and investment results. The SEC does not approve or disapprove of UITs or securities within a given UIT that are regulated primarily under the Investment Act of 1940.

• Investment Company Act of 1940. This Act regulates UITs by imposing requirements on disclosures of information about investment objectives, investment company structure, and operations. It also empowers the SEC to regulate fund activities.
• Financial Industry Regulatory Authority (FINRA). This self-regulatory organization does not directly regulate UITs, but it governs the broker-dealers and registered agents who sell them.

4.18. WHAT FEES AND COSTS ARE ASSOCIATED WITH OWNING UITS?

Understanding the costs involved in owning a UIT is perhaps the most confusing aspect of investing in one. All UITs come with fees and expenses. Some relate to sales charges while others concern the UIT’s operations. Because fees and costs detract from a UIT’s performance over time, you should consider the following when evaluating a UIT.

• Unitholder’s fees. UITs charge these fees for a transaction, including a purchase, redemption, or exchange. For instance, the maximum unitholder’s fee for Guggenheim Large-Cap Core Portfolio, Series 34 is 2.75%.

  – Initial sales charge. A UIT may charge a sales charge for the purchase amount when you buy UIT units. This fee compensates a financial professional for the services provided and is typically 1.00%, but can be higher. For example, Guggenheim Large-Cap Core Portfolio, Series 34 has no initial sales fee paid on a purchase.

  – Deferred sales charge. A deferred sales charge is deducted in periodic installments after the end of the initial offering period. This fee typically ranges from 1% to 3%, with a 1.50% charge being common. Generally, deferred charges are deducted from the holder’s distributions until the entire amount is paid. For example, the Guggenheim Large-Cap Core Portfolio, Series 34 has a deferred sales fee of 2.25%.

  – Creation and development fees. UITs charge creation and development fees to compensate their sponsors for determining the investment objectives, policies, and securities in the portfolio. This fee is often 0.50%. Guggenheim Large-Cap Core Portfolio, Series 34 also charges a 0.50% creation and development fee.

  – Redemption fee. A UIT may charge this fee when you redeem shares to cover expenses involved with the redemption. UITs with an initial sales charge usually don’t charge redemption fees. You pay any unpaid deferred sales charges upon redemption.

• Operating expenses. UITs also assess an annual fee to cover operating expenses and often to reimburse the trust sponsor for its supervisory activities, organization costs, and a creation and development fee. These charges are related to a fund’s operating costs and are deducted from its assets.

  – Organizing cost. UITs charge for amounts expended to organize the trust. The organizational cost is typically less than 0.50%. Guggenheim Large-Cap Core Portfolio, Series 34 reports an estimated organization cost of 0.34% as a percent of the public offering price.

  – Operating expenses. UITs charge these fees for selecting the portfolio of securities and providing related services, bookkeeping, and administrative and associated services such as research, technology, trading, and administration. A fund calculates this fee as a percentage of its daily net assets, which ranges between 0.50% and 2%. Given that UITs offer a fixed portfolio, they don’t incur management fees. They also don’t have ongoing marketing fees because most UITs don’t continually market their units to the public. Because the buying and selling of portfolio securities are limited, transaction costs are minimal. Guggenheim Large-Cap Core Portfolio, Series 34 has an estimated annual fund operating expenses of 0.24% as a percent of the public offering price.

4.19. TAKEAWAYS

Despite a declining number of UITs and AUM during the last two decades, UITs remain an appropriate investment alternative for some investors. UITs include securities professionally selected to meet growth or income-oriented portfolio objectives and follow a buy-and-hold investment strategy. Several characteristics make UITs attractive to some investors, including providing diversification benefits, having a defined portfolio with a specified lifespan, and offering various risk and return opportunities with flexible investment options.

This chapter provided a series of questions that UITs investors may face during their investment decisions, ranging from investment strategy to types of UITs available along with advantages and disadvantages of investing in them. When used properly, UITs are particularly suitable for investors who have well-defined investment horizons, including investing for retirement and a child’s college education. A UIT is similar to a mutual fund, ETF, and CEF because it bundles investments, typically stocks or bonds, into one unit, and offers diversification. However, UITs involve some twists such as defined lifespan and fixed portfolio. If you invest in a UIT, you should have a good understanding of financial markets and securities selection for the portfolio because the portfolio formed by the sponsor typically does not change during the UIT’s lifespan.

Despite their advantages, you should also be aware of the downsides associated with investing in UITs. One drawback is the possibility of a decline in the price of securities held in the portfolio as a result of being unable to align the portfolio with changing market conditions. Another disadvantage is your lack of control over choices of individual securities that go into the fund because a unit sponsor makes the security selections. However, investors in mutual funds, ETFs, and CEFs face the same drawback. Finally, UITs investing in bonds and other fixed income securities are sensitive to interest rate risk and credit risk.

In summary, mutual funds, ETFs, CEFs, and UITs have both similarities and differences. One is not inherently better than the others because each offers traits that the others don’t have. Additionally, each pooled investment might fit a specific investor’s needs better than the others. The bottom line is that you have to do your homework to ensure that investing in a particular PIV is right for you.