Unit Investment Trusts (UIT): an introduction

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By now, most investors are familiar with exchange traded funds (ETFs) because they have become one of the most popular securities on the market today. However, there are fewer investors who are familiar with mutual funds (UITs) despite the fact that some of the most popular ETFs in the world are in fact structured like UITs. Take the SPDR S&P 500 ETF (SPY), one of the largest funds in the world; under the hood, it’s actually an ITU.

What is an ITU?

An ITU generally issues redeemable units for investment purposes. In ETFs, these shares are only redeemable in large baskets, say 100,000 shares for example. Like all index-linked ETFs, an ITU does not actively trade its underlying securities, but rather buys a fixed portfolio like the S&P 500. When it comes to investing, expenses, dividends, trading and liquidity, UIT are structured and behave almost the same as ETFs. When it comes to unit creation, most UITs spend a large number of shares on an IPO and let them trade in the secondary market from there, without creating new shares during the term of the stock market. ITU life. This is similar to how a closed fund behaves. However, a number of ETFs that are UITs can still create new stocks for investors. [see also What Is An ETF (Exchange-Traded Fund)?].

There is one factor that many ignore that makes these products a little more interesting; they all have a mandatory termination date. Currently, there are only eight ITU-structured ETFs, four of which hold over $ 10 billion in total assets. These funds are listed below:

Funds Assets Termination date
ETF SPDR S&P 500 (ESPION, A) $ 155.34 billion 02/22/2118
QQQ ETF (QQQ, B +) $ 40.17 billion 3/4/2124
SPDR MidCap Trust Series I (MDY, B) $ 14.82 billion 04/27/2120
ETF Dow Jones Industrial Average (DIA, B) $ 11.81 billion 1/14/2123

The other four ETFs structured in ITU are: ADRA, ADRD, ADRE and ADRU. MDY and DIA both state in their prospectuses that the funds can be extended beyond their termination date. As for SPY and QQQ, they are set to close in over a century, so their end is of little concern at this time. Nonetheless, it is difficult for us to imagine a scenario in which products are not renewed or restructured (assuming they continue to gather assets) via a loophole to keep them in business. We’ll give State Street and Powershares the benefit of the doubt as they have over 100 years to navigate this situation.

What happens when an ITU terminates?

A ITU can be terminated for two reasons: it may reach its mandatory close date or there may be special circumstances in which it will shut down. QQQ, for example, notes in its prospectus that it can close if the underlying securities of the fund are worth less than $ 350 million combined. If the Nasdaq-100 were ever worth less than $ 350 million as a whole, you’d be more concerned with collecting weapons and food for the apocalypse than shutting down QQQ.

Let’s take SPY as an example of what happens when closing an ETF structured like an ITU, as the fund gives an abundance of detail in its prospectus. SPY will end either on January 22, 2118, or “the date 20 years after the death of the last survivor of eleven persons named in the trust agreement, the oldest of whom was born in 1990 and the youngest was born in 1993” according to his prospectus. We promise there’s nothing in there on a full moon or sacrifice.

If and when the fund ends, owners should receive a written notice 20 days before the closing date with a well-defined last trading day. This will give investors time to liquidate their holdings. If investors still hold shares on the day the fund closes, investors will receive cash equal to the net asset value of the fund, exactly the same way any other ETF behaves at the close. [see also Ten Commandments Of ETF Investing].

The bottom line

ITUs are very similar products to ETFs and only have a few nuances that make them different. When it comes to ITU-structured ETFs, the only major factor that makes them different is their termination date, which investors probably won’t have to worry about. Although they are very similar to ETFs, investors should always read the prospectus of any fund structured like an ITU, as they may contain unique details that may not be visible on the surface. As always, doing your homework will lead to sound investment decisions.

Follow me on twitter @JaredCummans.

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Disclosure: No position at time of writing.

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