Chapter 4: Unit Investment Trusts

Have you ever heard of a unit investment trust (UIT)? If not, you aren’t alone. Although most individual investors are probably unfamiliar with them, UITs can play an important role in the investment plans of some investors. Are you one of them?

A UIT is an investment company that offers a fixed portfolio, usually of stocks and fixed income securities, as redeemable units to investors for a specific time period. Its main purpose is to provide income and/or capital appreciation to its unitholders. Upon termination, a UIT’s proceeds are returned to unitholders or reinvested in another UIT.

UITs originated in the United States during the 1920s to facilitate an issuer’s sale of equity to the public by depositing shares in a trust and selling pro rata participating interests in the trust. Specifically, a businessman who wanted to increase the public ownership in a company with a stock price of $400 created one of the earliest UIT. He simply deposited one of the shares with his bank and received 10 receipts to sell to the public at a prorated price. Although a share of common stock might sell for tens or even hundreds of dollars per share during that period, units in these fixed trusts would sell for much smaller amounts allowing individual investors to participate.