A Guide to Investing in Unit Investment Trusts

What is a UIT?

A unit investment trust (UIT) is a professionally selected pooled investment vehicle in which a portfolio of securities is selected by the sponsor and deposited into the trust for a specified period of time. Generally, a UIT’s portfolio is not actively traded and follows a buy and hold strategy. A unit investment trust is registered with the SEC as a Registered Investment Company (RIC) or Grantor trust. The portfolio remains fixed until the termination of the trust, usually ranging from 13 months to as much as 30 years, depending on the underlying securities. Although the securities within the trust remain fixed and are not managed, the sponsor may remove a security from the trust under limited circumstances. These situations are outlined in the prospectus.

The UIT is designed to follow an investment objective over a specified time period, although there is no guarantee that the objective will be met. UITs are created by a trust sponsor where several investment terms are set forth such as the trust objective, what securities are placed in the trust, when the trust will end, what fees and expenses will be charged, etc. These items are detailed in the prospectus. Some UITs follow rules-based stock selection strategies which have hypothetical performance records back over several decades; this information can help investors decide if the investment strategy might be appropriate for their objectives and goals. Keep in mind that hypothetical performance, like any past performance, does not guarantee future results, which will differ from past performance.

Inter Consultant wants to ensure that you are investing in the products that best suit your financial situation, investment objectives, risk tolerance, time horizon, diversification and liquidity needs. This guide will help you better understand the features, costs and risks associated with UITs.

Types of UITs

There are primarily two categories of UITs: equity (stock) trusts and fixed-income (bond) trusts, which are described below. Within these categories, many trusts are available to suit a variety of investment objectives and risk levels, ranging from conservative to aggressive.

Equity UITs

• Strategy portfolios – seek to outperform a benchmark, such as a specific widely held index, using fundamental screens that reflect the historical behavior of the securities.
• Income portfolios – typically seek to provide dividend income and may also provide potential capital appreciation.
• Asset allocation portfolios – invest in different asset classes, styles, and capitalizations, and are designed to meet specific investment objectives to help better manage investors’ asset allocation needs.
• Sector portfolios – invest in companies involved in a specific industry such as energy, health care, financial services, or technology.
• Hybrid portfolios – invest in various underlying holdings, including equities, closed-end funds, and Exchange Traded Funds (ETFs). Many UITs will combine multiple securities within the same portfolio to gain exposure to different areas of the market.
• Research-based portfolios – invest in companies identified by our Equity Research analysts as part of an overall equity research list or published research theme created by our Equity Investment Products Group.

Buffered UITs

Buffered UITs are a type of “Non-Traditional” UIT that employ the use of derivatives contracts to provide a predetermined range of return outcomes based on the price performance of an underlying market at the trust termination.

Fixed Income UITs

• Tax-Free Fixed Income – invests in a pool of bonds that provide monthly or semiannual income exempt from federal income taxes, and in some cases, state income taxes.
• Taxable Fixed Income – invests in a pool of bonds that may include taxable municipal issues, corporate issues, or agency issues that provide monthly or semiannual income.

Read the Prospectus
UITs are sold by prospectus. The prospectus contains information you should consider, including the UIT’s investment objectives, risk, charges and expenses, and other information about the UIT. Your Financial Advisor can provide you with a prospectus for any UIT you may be considering. You should read it carefully before investing.

Features and Characteristics

Some of the key features and characteristics associated with investing in UITs include the following:

• Greater diversification. Since a UIT portfolio represents pro-rata ownership in a pool of securities, it provides a higher level of diversification than an investment in a single security; however, diversification does not ensure profit or protect against loss.
• Daily liquidity. A UIT can be redeemed daily at net asset value, which may be more or less than the original purchase price.
• Rebalancing opportunities. When the portfolio terminates, investors have the option to reinvest their proceeds into a new, rebalanced portfolio. Rebalancing may cause a taxable event unless units of the portfolio are purchased in an IRA or other qualified plan, and rebalancing does not ensure profit or protect against loss.
• Discipline. Unlike actively managed funds, the securities in the UIT remain fixed over the life of the investment.
• No manager-driven style drift. Because a UIT is clearly defined and not actively managed, there will be no style drift as a result of manager-driven trading.
• Capital gains. In the case of equity-related securities held in the UIT, there are no embedded capital gains. Capital gains taxes are only paid if there is a profit at the time of UIT termination or liquidation.

UIT Disclosure Document
Please read the UIT disclosure document to learn more about UITs, cost of investing and how your Financial Advisor and Inter Consultant are compensated.

Taxation

Unit holders are subject to taxes on their investments. Investors may realize a taxable gain or loss on their federal tax returns if units are redeemed at or prior to the termination of the trust. Dividends, interest and/or capital distributions are also subject to taxes. Dividends will fluctuate and are not guaranteed. If the unit holder elects to reinvest redemption proceeds into another UIT, it is considered a taxable event, and the unit holder will realize any gain or loss and wash sale provisions may apply. For more information regarding alternative minimum tax, nonresident aliens, or state or foreign withholdings, please read the prospectus and/or contact a tax advisor or attorney.

Both Regulated Investment Company (RIC) and grantor structures are subject to reclassification. Reclassification is income and/or principal received by the trust and distributed to unit holders. After year-end, issuers will adjust (reclassify) declarations to reflect what was paid during the previous tax year. It can generally be reclassified as qualified dividend income, return of capital, long-term capital gain or short-term capital gain. Because the reclassification could result in a more beneficial taxable event for unit holders, it is important to take this into consideration when planning the timing of when you file your taxes. You should consult your tax advisor prior to making any such investment decision.

For IRA and other tax-deferred accounts, taxes on capital gains and income received are deferred until distributions are made.

Choices at Termination

Since UITs have a fixed time horizon, investors at termination can elect to use the proceeds of the terminating trust to purchase a new UIT or the proceeds will be credited into the investor’s account on settlement date at the net asset value. Prior to the trust’s termination, investors may sell/redeem their UIT shares at the NAV less any remaining deferred sales charges. The proceeds from the sale will be credited to the investor’s account within two business days after the sale (Trade Date +1). Also, under limited circumstances certain trusts allow investors to elect to receive their pro-rata shares in-kind but this may create a taxable event.

If you sell prior to maturity, please be advised that you will pay the full sales charges as though you held the investment until maturity.

Investors should consider the investment objectives, risks, charges and expenses of unit investment trusts carefully before investing. The prospectus contains this and other information about unit investment trusts. The prospectus is available from your financial advisor and should be read carefully before investing.