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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75376  
Subject: Re: UITs Date: 9/30/2004 7:07 PM
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Typically a UIT is set up by a bank, a brokerage company, or another investment company. It is sponsored by a broker.
A prospectus is written. This UIT will invest in a particular type of security--perhaps the Dogs of the Dow, municipal bonds issued by a certain state and having a certain duration, perhaps certain stocks that the group setting up the UIT thinks have particular promise. The prospectuses are peddled to potential customers by brokers. The trust has a specific start date and end date.
People buy units. The broker keeps a commission of typically 5-7%. The trust goes about its business as described in the prospectus, and buys bonds, stocks, or whatever the prospectus said. Units are distributed to the investors. The sponsor may make a secondary market, so anyone who wants to cash out ahead of time can sell their units back to the bank, investment company or brokerage, at a discount from net asset value. Investors typically can call an 800 number any time to find the net asset value and offering price for their units.
The trust, having made its investments, proceeds to collect dividends or interest, and distribute them at regular intervals to the investors. If a bond matures or is called, the principal is distributed. The trust will not buy another bond to replace the called or matured one.
If the trust invests in stocks, it will sell the stocks just before the ending date of the trust, distributed the funds and cease to exist. If it invests in bonds, it will cease to exist after all the bonds have matured.
There are some small expenses to the sponsor, but since it is doing no buying or selling they are small. The cost of mailing checks and running an office or its share of the office. A bond trust will distribute progressively smaller amounts as it goes along because the bonds that are called or mature are not replaced.

The units are typically sold in multiples of $1000.

It does provide a balanced portfolio for a relatively small outlay. The initial expense is relatively high, but after that there are few further expenses.

I'd rather own the individual bonds...

Best wishes, Chris
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