By now, most investors are familiar with exchange-traded funds (ETFs), as they have become some of the most popular securities currently on the market. There are, however, fewer investors who are familiar with unit investment trusts (UITs) despite the fact that some of the most popular ETFs in the world are actually structured as UITs. Take the SPDR S&P 500 ETF (SPY), one of the largest funds in the world; underneath the hood, it is actually a UIT.What Is a UIT?
A UIT usually issues redeemable units for investment. In ETFs, these shares are only redeemable in large baskets, say 100,000 shares for example. Like all indexed ETFs, a UIT does not actively trade its underlying securities, but instead buys a fixed portfolio like the S&P 500. As far as investment, expenses, dividends, trading, and liquidity are concerned, UITs are structured and behave nearly identically to ETFs. When it comes to creation of units, most UITs outlay a slew of shares at an IPO and let them trade on the secondary market from there, creating no new shares in the UIT’s lifetime. This is similar to how a closed-end fund behaves. A number of ETFs that are UITs, however, can still create new shares for investors [see also What Is An ETF (Exchange-Traded Fund)?].
There is one factor that many are unaware of that makes these products a bit more interesting; they all have a mandatory termination date. Currently, there are just eight ETFs structured as UITs, with four of them holding over $10 billion in total assets. These funds are listed below:
|SPDR S&P 500 ETF (SPY, A)||$155.34B||1/22/2118|
|QQQ ETF (QQQ, A-)||$40.17B||3/4/2124|
|SPDR MidCap Trust Series I (MDY, B)||$14.82B||4/27/2120|
|Dow Jones Industrial Average ETF (DIA, A)||$11.81B||1/14/2123|
The four remaining ETFs structured as UITs are: ADRA, ADRD, ADRE, and ADRU. MDY and DIA both state in their prospectuses that the funds may be extended beyond their termination date. As for SPY and QQQ, they are set to close over a century from now so their termination is of little concern at this time. Still, it is hard for us to think of a scenario where the products are not renewed or restructured (assuming they continue to gather assets) via some loophole to keep them trading. We’ll give State Street and Powershares the benefit of the doubt, as they have over 100 years to navigate that situation.What Happens When a UIT Terminates? Nasdaq-100 were to ever be worth less than $350 million as a whole, you would be more concerned with gathering weapons and food for the apocalypse than you would about QQQ closing its doors.
Let’s use SPY as an example of what happens when an ETF structured as a UIT closes, as the fund gives an abundance of detail in its prospectus. SPY will terminate 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 of whom was born in 1993″ according to its prospectus. We promise there’s nothing in there about a full moon or sacrifice.
If and when the fund does terminate, owners must be given written notice 20 days before it is set to close with a clear-cut final trading day. This will give investors time to liquidate their holdings. If investors still hold shares on the day the fund is closed, investors will receive cash equal to the net asset value of the fund, exactly the same way any other ETF behaves when it closes [see also Ten Commandments Of ETF Investing].The Bottom Line
UITs are very similar products to ETFs, and only come with a few nuances that make them different. As far as ETFs that are structured at UITs, the only major factor that makes them different is their termination date, something that investors likely will not have to worry about. Though they are very similar to ETFs, investors should always read the prospectus of any fund structured as a UIT, as they can have 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 positions at time of writing.