Unit Investment Trust (UIT) Assets Top $71 Billion in 2012

According to the Investment Company Institute (ICI), data on the market value of unit investment trusts (UITs) issued and outstanding as of year-end 2012 indicates a total of 5,787 trusts with a value of $71.73 billion. According to reports submitted by the major sponsors of UITs to ICI, at year-end 2012 there were:

  • 2,808 tax-free bond trusts, with a market value of $15.76 billion
  • 553 taxable bond trusts, with a market value of $4.06 billion
  • 2,426 equity trusts, with a market value of $51.91 billion.

Over the last 5 years, while the number of UITs outstanding decreased from 5,984 to 5,787, total net assets invested in UITs have grown by over 151%, starting at approximately $28 billion at the end of 2008 and finishing at the aforementioned $72 billion at the end of 2012.

Unit Investment Trust (UIT) Total Net Assets (Millions of Dollars, Year-End)

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Source: Investment Company Institute, April 2013

The popularity of UITs in recent years can be attributed to a number of factors, one of which is that many of the more popular UITs have primary investment objectives oriented towards current dividend income.  These same UITs can invest in income producing securities that can tend to pay a higher level of current income when compared to more traditionally recognized income producing securities (Ex. Bonds).    Such income producing securities can include, but are not limited to, closed-end funds (that may or may not employ leverage), preferred stocks, real estate investment trusts (REITs), business development companies (BDCs), master limited partnerships (MLPs) and dividend paying equities.   These strategies have been particularly appealing within an interest rate environment with persisting record low yields of fixed income/ debt securities.

For those who are not completely familiar with UITs, the following summary information may be beneficial to help better understand this product type.

  • Unit Investment Trusts (UITs) are a fixed portfolio of stocks, bonds or other securities. These types of portfolios allow investors to know what securities are held within a UIT as of the date of deposit, as well as the mandatory termination date of the trust. While it is not common, a trust may terminate early as described in the prospectus.
  • UITs offer an attractive opportunity for investors to own a portfolio of securities via a low minimum, typically liquid investment. As a point of contrast, while many actively managed funds continually buy and sell securities, thereby changing their investment mix, the securities held in a UIT generally remain fixed.
  • Some UIT securities are chosen according to a quantitative selection process determined by a sponsor while some are based on an index. Other UITs are chosen by experienced analysts or portfolio managers, who research the securities and screen them for various characteristics, according to specific objectives. Once securities are selected, the UIT portfolios are then supervised accordingly throughout the life of the trust.
  • While it is rare, a security held in a UIT may be removed from a portfolio under certain circumstances, such as a significant decline in credit rating. By and large, securities held in a UIT remain fixed for the life of the trust, regardless of market value.
  • At the maturity of a UIT, unitholders generally have three options:
    • Option #1: Rollover at a reduced sales charge – At a reduced sales charge, investors may roll over into a new series of the same trust, if available or potentially other UITs from the same of different sponsor of UITS, available in the primary market.  It should be noted that maturity rollover is considered a taxable event. Please refer to each trust’s prospectus for complete rollover option information. Investors should be aware that there is a time limit to notify the trustee of the rollover.
    • Option #2: Maturity – Unitholders may do nothing and allow the portfolio units to mature. The trust will liquidate and the unitholder will receive a cash distribution of the trust’s proceeds, if any.
    • Option #3: In-kind distribution – Unitholders may generally request an in-kind distribution of the securities underlying the units if they own 2,500 or more units at either the time of purchase or maturity. Please see additional provisions set forth in the prospectus of each Trust in this regard.
  • Typical minimums for UIT purchases are 100 units; however, the minimums may vary based on the type of UIT. Higher minimums may also be required by each respective brokerage firm.
  • Unitholders may sell all, or a portion of, their units any day the stock market is open. These unitholders will receive the then-current net asset value of the units, based on the current market value of the underlying securities in the portfolio, less any remaining deferred sales charge, as of the evaluation time. As the market fluctuates, of course, so will the value of your units. Therefore, units may be worth more or less than what the unitholder originally paid.
  • UITs are priced at the end of each business day similar to mutual funds. The price is based on the market value of the underlying securities and includes cash and other assets and liabilities held by the trust.
  • UITs are available in a sales charge structure for commission accounts as well as for fee/wrap accounts. It is best to check with each individual brokerage firm to see if UITs are eligible for purchase on their fee/wrap platform.
  • Unit investment trusts are one of three basic types of investment companies. Investment companies are subject to stringent federal laws and oversight by the U.S. Securities and Exchange Commission (SEC). It is important to note that the SEC does not approve or disapprove of UITs or the securities within a given UIT or pass upon the adequacy of any prospectus for a given UIT. Investment companies are regulated primarily under the Investment Company Act of 1940. This federal statute is highly detailed and governs the structure and day-to-day operations of investment companies. Investment companies are also subject to regulations of the Securities Act of 1933, FINRA, and the Securities Exchange Act of 1934.

We encourage all investors to educate themselves on all aspects of UITs, including risks and expenses, in addition to understanding each UIT’s investment strategy in particular before considering an investment.

Disclosure:  Hennion & Walsh is the sponsor of SmartTrust® Unit Investment Trusts (UITs). For more information on SmartTrust® UITs, please visit www.smarttrustuit.com.  The overview above is for informational purposes and is not an offer to sell or a solicitation of an offer to buy any SmartTrust® UITs.  Investors should consider the Trust’s investment objective, risks, charges and expenses carefully before investing. The prospectus contains this and other information relevant to an investment in the Trust and investors should read the prospectus carefully before they invest.