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Where have you heard about unit investment trusts (UIT)?

Unit investment trust (UIT)

What is a unit investment trust (UIT)?

A unit investment trust (UIT) is one of the three main types of investment company, the others being mutual funds and closed-end funds. It is basically an exchange-traded fund (ETF), which offers a fixed investment portfolio of stocks and bonds.

ETFs are one of the most popular securities for investors, and some of the biggest ETFs are actually unit investment trusts. For example, the SPDR S&P 500 (SPY) ETF and Dow Jones Industrial Average (DIA) ETF.

What you need to know about unit investment trusts (UIT).

A UIT gets its name from the redeemable ‘units’, or securities, that it issues. These units are limited to a specific number and are put up for sale in a one-off public offering.

When a UIT is created, a predetermined termination date is set. UIT is not actively managed as it doesn’t have a board of directors or an investment adviser because the investment portfolio of a UIT is fixed. Rather than actively trading, like a mutual fund, a UIT will buy a number of specific stocks or bonds and then hold them. This makes it clear to investors what they can expect for the life of the UIT.

The benefit of using a UIT instead of a mutual fund is that UITs protect investors from unrealised capital gains taxes. As a UIT has a specific time period, it acts as a new, individual investment which means that capital gains tax only applies to the initial cost of the UIT’s securities. However, some investors prefer mutual funds as they can trade the stock.

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