Unit investment trusts (UITs) buy a fixed portfolio of securities and allow investors to redeem their units, similar to a mutual fund. A UIT invests the money raised from many investors in its single public offering in a generally fixed portfolio of stocks, bonds or other securities. REITs, or real estate investment trusts, are companies that own or finance income-producing real estate in a range of real estate sectors. These real estate companies have to meet a number of requirements to qualify as REITs.
Most REITs are listed on major stock exchanges and offer a number of advantages to investors. A UIT's portfolio may contain one of several types of securities. The two main types are stock (equity) trusts and bond (fixed income) trusts. Bond trusts issue a certain number of units, and when they are all sold to investors, the primary offering period of the trust is closed.
Bond trusts pay a monthly income, often in relatively constant amounts, until the first bond in the trust is called or matures. When this occurs, the redemption proceeds are distributed to clients through a pro-rata return of principal. The trust then continues to pay the new amount of monthly income until the next bond is redeemed. This continues until all the bonds in the trust have been liquidated.
Bond trusts are generally appropriate for clients seeking current income and capital stability. A UIT can be incorporated as a regulated investment company (RIC) or as a grantor trust. A RIC is a trust, corporation or partnership in which investors have common investment and voting rights, but do not have a direct interest in the investments of the company or investment fund. A grantor trust, on the other hand, grants investors proportionate ownership of the underlying securities.
A UIT is created by a document called a Trust Indenture. This document is drafted by the fund sponsor and appoints the trustee and the evaluator. Under US law, the sponsor and the trustee cannot be the same. The sponsor selects and assembles the securities to be included in the fund.
The trustee holds the securities, maintains the unitholders' records and does all accounting and tax reporting for the portfolio. The largest issuer of UITs is First Trust Portfolios. Other sponsors include Incapital, SmartTrust, Invesco Unit Trusts, Millington Securities, Advisors Asset Management and Guggenheim Funds. Most large brokerage firms (such as Merrill Lynch and LPL Financial) sell UITs created by these sponsors.
From a tax perspective, UITs provide a shelter from the unrealised capital gains taxes typical of a mutual fund. Since individual UITs are pooled and purchased for specified periods of time, the cost basis consists of the initial purchase price of the securities held in the trust. A mutual fund, on the other hand, taxes the individual on the basis of the entire previous tax year, regardless of the date of purchase. An investor could, for example, purchase a mutual fund in October, absorb a loss during the last quarter of the year and continue to be taxed on the capital gains of the fund based on the overall performance of the underlying securities as of 1 January of the current year.
A UIT avoids this potential tax consequence by bringing together a completely new investment for each individual investor. A unit investment trust (UIT) is an investment company that holds a fixed portfolio and offers units of ownership in the trust to investors. The portfolio usually consists of stocks and bonds, but may include REITs, American Depositary Receipts, limited partnerships and other investments. These are very different investments from equity REITs; in fact, they are not even classified as real estate.
Nareit is the global representative voice for REITs and real estate companies with interests in the United States. REITs offer an investment opportunity, like an investment fund, that makes it possible for ordinary Americans, not just Wall Street, banks and hedge funds, to benefit from valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, prosper and revitalise. For a relatively low minimum purchase, investors can own a portfolio of professionally selected securities, which are monitored on an ongoing basis. Many REITs are listed on major stock exchanges and investors can buy and sell them as if they were equities throughout the session.
The purpose of REITs is to enable everyday investors to be able to invest in real estate assets that they otherwise would not be able to. First, equity REITs are the type of real estate investment trusts that own property as their core business. Unit investment trusts are set up with a termination date, at which time investors get back the value of their investment. Real estate investment trusts, or REITs, can be fantastic ways to add growth and income to your overall portfolio, while adding diversification.
Investors own REITs through their retirement savings and other mutual funds, according to Nareit, a Washington, D. Individual securities and ETFs can be bought and sold throughout each business day, while mutual fund shares and trust units can be bought and redeemed based on prices determined at the close of each business day. The track record of reliable and growing dividends from REITs, combined with long-term capital appreciation through rising share prices, has provided investors with attractive total returns over most periods over the past 45 years compared to the general stock market, as well as to bonds and other assets. These advantages of mutual funds provide a unique and stable investment vehicle for small investors.
With a traditional mutual fund, it is possible to experience a loss on your investment while being taxed on someone else's capital gains - capital gains you never enjoyed. Surprisingly enough, it wasn't that long ago that unit investment trusts outnumbered mutual funds. However, diversified and specialised REITs may have different types of properties in their portfolios, such as a REIT that is made up of office and retail properties.