Why mutual funds can be a good investment alternative

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According to the Investment Company Institute (ICI), data on the market value of mutual funds (UITs) issued and outstanding at the end of 2012 indicates a total of 5,787 trusts with a value of 71 , 73 billion dollars. According to reports submitted by major ITU sponsors to ICI, at the end of 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 past 5 years, as the number of ITUs in circulation grew from 5,984 to 5,787, total net assets invested in ITUs grew by more than 151%, starting at around $ 28 billion at late 2008 and ending at the aforementioned $ 72 billion at the end of 2012.

Unit Investment Trust (UIT) Total Net Assets (millions of dollars, year-end)

Source: Institute of Investment Companies, 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 geared towards current dividend income.

These same UITs may invest in income-producing securities which may tend to pay a higher level of current income compared to more traditionally recognized income-bearing securities (ie bonds). These income-producing securities may include, but are not limited to, closed-end funds (which may or may not use leverage), preferred stocks, real estate investment trusts (REITs), business development companies ( BDC), Master Limited Partnerships (MLP)) and dividend paying stocks.

These strategies have proven to be particularly attractive in an interest rate environment characterized by persistently low yields on fixed income / debt securities.

For those who are not completely familiar with ITUs, the following summary information may be helpful to better understand this type of product.

  • Unit Investment Trusts (UIT) are a fixed portfolio of stocks, bonds or other securities. These types of portfolios allow investors to know what securities are held in an ITU on the date of deposit, as well as the date of mandatory termination of the trust. Although this is not common, a trust can be terminated early, as described in the prospectus.
  • ITUs offer investors an attractive opportunity to hold a portfolio of securities through a low minimum investment, usually liquid. In contrast, while many actively managed funds continually buy and sell securities, thereby changing their investment mix, the securities held in an ITU generally remain fixed.
  • Some ITU stocks are chosen through a quantitative selection process determined by a sponsor while others are index-based. Other UITs are chosen by experienced analysts or portfolio managers, who research stocks and select them for various characteristics, based on specific goals. Once securities are selected, ITU’s portfolios are then overseen accordingly throughout the life of the trust.
  • Although it is rare, a security held in an ITU may be removed from a portfolio under certain circumstances, such as a significant downgrade in credit rating. Overall, the securities held in an ITU remain fixed for the life of the trust, regardless of their market value.
  • At the expiration of an ITU, unitholders generally have three options:
    • Option 1: Rollover with reduced subscription costsAt a reduced subscription fee, investors may invest in a new series of the same trust, if applicable, or potentially in other UITs from the same or another sponsor of UITS, available in the primary market. Note that maturity rollover is considered a taxable event. Please refer to the prospectus of each trust for complete information on the rollover options. Investors should be aware that there is a time frame to notify the trustee of the rollover.
    • Option 2: MaturityUnitholders can do nothing and allow the Portfolio Units to mature. The Trust will be wound up and the Unitholder will receive a cash distribution of the proceeds of the Trust, if any.
    • Option n ° 3: In-kind distribution – Unitholders can generally request an in-kind distribution of the securities underlying the units if they own 2,500 or more units at the time of purchase or maturity. Please see the additional provisions set out in the prospectus of each trust in this regard.
  • Typical minimums for ITU purchases are 100 units; however, the minimums may vary depending on the type of ITU. Higher minimums may also be required by each respective brokerage firm.
  • Unitholders can sell all or part of their units on each trading day. Such 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, at the time of valuation. As the market fluctuates, of course, the value of your units will also vary. Therefore, units may be worth more or less than what the unitholder originally paid.
  • ITUs are priced at the end of each business day in the same way as 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.
  • ITUs are available in a sales charge structure for commission accounts as well as for expense / wrap accounts. It’s best to check with each brokerage firm to see if UITs are eligible to purchase on their fee / wrap platform.
  • Mutual funds are one of the three main types of investment companies. Investment firms are subject to strict federal laws and oversight by the United States Securities and Exchange Commission (SEC). It is important to note that the SEC does not endorse or disapprove of ITUs or titles within a given ITU and does not pass judgment on the suitability of a prospectus for any given ITU. Investment companies are governed primarily by the Investment Companies Act 1940. This federal law is very detailed and governs the structure and day-to-day operations of investment companies. Investment firms are also subject to the regulations of the Securities Act of 1933, FINRA, and the Securities Exchange Act of 1934.

I encourage all investors to educate themselves on all aspects of ITU, including risks and expenses, in addition to understanding the investment strategy of each particular ITU before considering an investment.

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

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