Unit Investment Trusts (UITs)

Lesson

Unit Investment Trusts (UITs) are a pooled investment vehicle that allows investors to pool their money together to invest in a diversified portfolio of securities. UITs are created by a sponsor and are managed by a trustee. They have a fixed portfolio and a predetermined termination date. UITs can invest in various securities, such as stocks, bonds, and other investment vehicles.

Practice Question #1

Which of the following is a characteristic of a Unit Investment Trust (UIT)?

A) Actively managed portfolio

B) No predetermined termination date

C) Fixed portfolio

D) Unlimited number of shares

Select an option above to see an explanation here.

A) Actively managed portfolios are characteristic of mutual funds, not UITs. B) UITs have a predetermined termination date, unlike mutual funds. C) UITs have a fixed portfolio, which does not change over the life of the trust. D) Closed-end funds have a fixed number of shares, while UITs have a fixed portfolio.

Terms

Unit Investment Trust (UIT):: A pooled investment vehicle that allows investors to pool their money together to invest in a diversified portfolio of securities.
Termination Date:: The predetermined date when the UIT will dissolve and distribute its assets to the investors.

Practice Question #2

What is the role of the trustee in a Unit Investment Trust (UIT)?

A) Selecting the securities in the portfolio

B) Managing the UIT and ensuring it operates in the best interest of the investors

C) Trading the UIT's securities on an exchange

D) Actively managing the portfolio to outperform a benchmark

Select an option above to see an explanation here.

A) The sponsor is responsible for selecting the securities in the UIT's portfolio. B) The trustee is responsible for managing the UIT and ensuring it operates in the best interest of the investors. C) UITs do not trade on an exchange like ETFs or closed-end funds. D) UITs have a fixed portfolio and are not actively managed to outperform a benchmark.

Do Not Confuse With

Mutual Funds:: Another type of pooled investment vehicle with an actively managed portfolio and no predetermined termination date.
Exchange-Traded Funds (ETFs):: Similar to UITs, but trade on an exchange like a stock and can be bought and sold throughout the trading day.
Closed-End Funds:: A pooled investment vehicle with a fixed number of shares that trade on an exchange.

Practice Question #3

How is the net asset value (NAV) of a Unit Investment Trust (UIT) calculated?

A) Total value of the UIT's assets minus its liabilities, divided by the number of outstanding shares

B) Market price of the UIT's units multiplied by the number of outstanding units

C) Total value of the UIT's assets minus its liabilities, divided by the number of outstanding units

D) Market price of the UIT's units multiplied by the number of outstanding shares

Select an option above to see an explanation here.

A) NAV is calculated using the number of outstanding units, not shares. B) NAV is based on the total value of the UIT's assets and liabilities, not the market price of its units. C) The NAV of a UIT is calculated by taking the total value of its assets minus its liabilities, divided by the number of outstanding units. D) NAV is based on the total value of the UIT's assets and liabilities, not the market price of its units or shares.

Historical Example

In the 1980s, UITs gained popularity as a way for investors to gain exposure to a diversified portfolio of municipal bonds. This allowed investors to benefit from municipal bonds' tax advantages while reducing the risk associated with investing in individual bonds.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

Investors looking for a diversified investment in the technology sector might consider investing in a UIT with a fixed portfolio of technology stocks. This would allow the investor to gain exposure to the industry without researching and selecting individual stocks.