Unit Investment Trusts Regain Popularity

Unit investment trusts are no longer just for municipal bonds, according to a report from the Associated Press.

The once-popular tools have more recently been used to hold equities, much like an exchange-traded or mutual fund. Often, the lineup includes between 10 and 40 stocks, for a period of between one and five years.  

The principle difference between UITs and mutual funds is that holdings remain constant, and although investors can sell the trusts back to the issuer at the net asset value, the best value generally comes from holding on until the termination date, a type of expiration date after which the investment strategies are expected to be obsolete, and the trusts dissolve. 

"They have a maturity date almost like a CD," said Christian Magoon, managing director of product development at Claymore Securities, a company that packages the products.

Municipal bonds once dominated the UIT space with as much as $91.7 billion out of $105.4 billion total placed in tax-free debt trusts. But when interest rates plunged, investors favored fixed-income mutual funds. Municipal bond trusts now account for only $10 billion of the industry's holdings. 

UITs are often designed to beat particular indices by picking from an index only those holdings poised for best performance. "Our value proposition is that the returns are good," said Alan Rooney, vice president of new product at First Trust Portfolios.

UBS offers a Value Select 10 unit trust, which picks 10 high-yielding stocks. The lineup changes after two months, and those who have their investment rolled from one UIT to the next incur no fees.

The Van  Kampen EAFE  Select 20 Portfolio includes the 20 highest dividend-yielding stocks from the Morgan Stanley Capital Investment EAFE emerging markets index. The Trust, which was launched in July and ends next October has returned 16.5% annually since 1975, whereas the Morgan Stanley index upon which is it based gained 11.9%.

But because the trusts dissolve and regroup constantly, getting accurate historical overviews is difficult, said Barry Kaplan, a financial adviser at Cambridge Southern Financial Advisors.

ETFs pose stiff competition, but while they offer the same transparency and passive management, they must track a stock index, and therefore have more limited holdings options.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.