For millions of investors looking for higher returns and portfolio diversification, there is no better investment than a mutual fund. Their combination of professional management, liquidity and reduced volatility makes them ideal vehicles for virtually any type of investment objective. However, some investors follow simpler investment strategies that do not require active portfolio management, and are therefore unwilling to pay the high sales charges and ongoing management fees assessed by many funds.           

Fortunately, there is an alternative for those in this category. Unit investment trusts (UITs) provide diversification similar to mutual funds, but without the internal portfolio turnover. A unit investment trust is simply a set portfolio of securities that have been selected according to either a specific set of characteristics or perhaps a specific investment strategy. Each unit of the trust represents an undivided interest in each of the securities held within the trust. Each trust will hold the securities for a set term and then mature. Upon maturity, the securities in the trust are reset according to the trust’s objective if necessary. The process is then repeated.  

One of the most common examples of this is the “Dogs of the Dow” strategy. The ten highest dividend-yielding stocks from the Dow Jones index are purchased within the UIT and held for 13 months. Then the stocks within the trust are readjusted according to this strategy, and a new trust is issued for another 13 months.  

Because they are not actively managed, UITs do not generate capital gains or losses of any kind, except at maturity. Gains and/or losses realized from UITs will virtually always be long-term, assuming that the term of the trust is more than a year (I personally have never seen one with a shorter term.) They can pass through interest and dividends periodically, depending upon the investment objective of the trust. Like mutual funds, there are many different types of UITs that meet various investment objectives, such as growth, income, or sector exposure.            

UITs also generally cost less to invest in than actively managed investments. Although most UITs do have a nominal sales charge, they generally have no annual expense fees of any kind, due to their passive management. Even their initial fees tend to be fairly low. Many of the trusts that follow the “Dogs of the Dow” strategy have an entrance fee of around 1%. To find out more about UITs, consult your financial advisor.