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Investment planning docs.

Mutual Fund Education

Mutual Funds vs. Unit Investment Trusts (UITs)

Brian Mathews Feb 27, 2018


Mutual funds seem to be the clear leader in the open-ended fund world, with more than $16 trillion in net assets as of 2016. Unit Investment Trusts (UITs) are much less popular and only have around $85 billion in net assets as of 2016. Even though both mutual funds and UITs allow investors to buy a single diversified portfolio in one investment, there are several similarities and differences between them.

Be sure to check out mutual fund classifications here.


Similarities


1. Open-Ended Structure

Perhaps the biggest similarity between mutual funds and UITs is that they are both open-ended investment companies that are registered under the Investment Company Act of 1940. The Securities and Exchange Commission (SEC) enforces and regulates the legislation. The SEC sets forth obligations and regulations that an investment company must abide by while offering investment product securities.

2. Underlying Investment

Both products can invest in a diversified portfolio of stocks, bonds or other securities that is put together by a professional money manager. For example, the Guggenheim Blue Chip Growth Portfolio Series 17 is a UIT that invests in ‘blue chip’ growth stocks, with its holdings in companies like Alphabet Inc., Amazon Inc., Facebook Inc., and Microsoft Inc. A very similar mutual fund portfolio is the T. Rowe Price Blue Chip Growth Fund (TRBCX) that uses a very similar strategy and has almost the same holdings as the Guggenheim UIT. Both mutual funds and UITs have specific investment strategies that can fit the need of almost any investor.

3. Taxation

Another similarity between mutual funds and UITs is the way they are taxed. Both are required to distribute capital gains and dividends to shareholders. Since both have underlying investments, capital gain distributions are passed directly to the shareholder. Mutual funds, for example, frequently issue capital gains to their shareholders toward the end of the calendar year. UITs issue capital gains or losses when the actual units mature or are sold prematurely. Both also tax their shareholders on any dividends issued, regardless of whether they are reinvested or not.

To familiarize yourself with regulations governing the mutual fund industry, read about the Investment Company Act of 1940.


Differences


1. Product Structure

The largest difference between the two investment products is the way they are structured. Both mutual funds and UITs are purchased in ‘shares’, which represent a single unit. However, mutual funds can be bought and sold at their net asset value on a daily basis. Mutual funds do not expire or mature. However, UITs are designed to end on a specific maturity date. Typically, UITs mature after 15 months or 24 months but some can go even longer. The First Trust Balanced Income, 60, for example, has an initial offering date of January 17, 2018 and a portfolio end date of January 17, 2023.

2. Way to Invest

Another difference between mutual funds and UITs is how they are initially offered to the public. Mutual funds continually offer shares to investors; a fund can only stop issuing if its manager can no longer handle the capacity of more investors. A UIT is first offered as an initial public offering, where it can market orders to eventually trade on an official start date. Once a UIT reaches its offering date, it then trades on the secondary market for investors to purchase. However, to satisfy demand for popular UITs, the investment company will just keep offering another series to the UIT. In the example of the First Trust Balanced Income, the issue done on January 17, 2018 was the 60th of the series. The 59th issue was offered on November 11, 2017; series 39 through series 60 are currently still active.

3. Portfolio Management Style

Investor often seek out mutual funds because the underlying funds are actively managed. The portfolio manager has the ability to buy and sell a variety of investments, according to restrictions mentioned in the prospectus, in an effort to beat its peer group. UITs, on the other hand, are set upon the initial offering and do not change during the course of the UIT’s life. A UIT’s investment strategy can only change prior to its initial public offering date and is done from series to series. Mutual funds also tend to have a lot more underlying holdings than UITs. The T. Rowe Price Blue Chip Growth fund has 123 holdings while the Guggenheim Blue Chip Growth Portfolio Series 17 has only 30 holdings.

Check here to know if active management of mutual funds is worth the price.

4. Fees

Fees are another major difference between UITs and mutual funds. Both have underlying operating fees that can be attributed to the fund’s marketing efforts and asset management services. However, each has its own distinct differences. Standard UITs charge a deferred sales charge and a ‘creation and development’ (C&D) fee. This deferred sales charge is internal and can range from 1.0% to 3.0% and is paid in monthly installments over the life of the UIT while the C&D fee is charged up front. Instead of a deferred sales charge, some UITs have an upfront sales charge where it is immediately charged to the shareholder, regardless of how long they end up owning it. The Guggenheim Blue Chip Growth Portfolio Series 17, for example, has a deferred sales charge of 2.25% and a C&D fee of 0.50%, making the total sales charge equal to 2.75%. However, UITs sold in wrap advisory accounts do not have a sales charge and only incur the C&D fee for shareholders.

A shareholder can purchase mutual funds in several ways f. For an ‘A’ shareholder, there can be a higher upfront sales charge with the only ongoing fee being the expense ratio. This could range from 2.00% to 5.75%, depending on the type of fund being purchased. Another common share class is the ‘C’ share of mutual fund that allows investors to pay for the fund using a level-load. Most funds will charge a 1% upfront sales charge to the shareholder and then a 1.0% trailing annual fee, in addition to the expense ratio. Funds that are in wrap advisory accounts do not have sales charges; the only fees charged are the expense ratios. Expense ratios vary, depending on the style and management of the particular fund. Vanguard is one firm that has been offering mutual funds at relatively lower fees. Conversely, some funds charge a much higher expense ratio; the SteelPath MLP Select 40 Fund (OSPSX) has a gross expense ratio of 4.59%.

Want to know more about the typical fees associated with a mutual fund? Check here.


The Bottom Line


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