What is a Unit Investment Trust?

The US Economy has a long history of negative fluctuation and government regulation for stabilization. The most notable down flux was the 1929 stock market crash. The government reacted by instituting many new policies and procedures to stabilize the market and a Unit Investment Trust or UIT, is part of one of those acts.

Mutual funds were introduced in 1924 and were gaining popularity until the crash. To give backbone to this and other types of investments Congress passed Securities Act of 1933 and the Securities Exchange Act of 1934. At that time investment companies were just starting out so the SEC developed the Investment Company Act of 1940. This act defined the standards by which investment companies should be monitored.

The 1940 act also clearly divided investment companies into three classifications and one was a Unit Investment Trust. A UIT are clearly defined and (unmanaged) portfolio of securities with a specified life. Unit Investment Trusts are constructed out of stocks and bonds by a third party (called a “sponsor”) and the set portfolios are then sold through brokers to investors.

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Unit Investment Trusts usually pay out dividends, as that is how the sponsor designs them. A Trust Indenture is the document that officially establishes a UIT. The US laws dictate that the Sponsor and the Trustee of the UIT not be the same person to avoid a conflict of interest. Because of the structure of the UIT there are tax benefits that should be discussed with your financial advisor.

Open-end funds, close-end funds and unit investment trusts are all cooperative investment schemes. Although we have come to think of the word “scheme” as a negative manipulation, in this case it simply refers to the fact these types of investments are a way for diverse ones portfolio with other investors. With the power of the group they can take advantage of a wider range of investment options, as they wouldn’t be practical for most individual investors. Another perk to this scheme, the group shares the costs of the fees for participating in these investments.