understanding unit trusts an investor guide

2016

Understanding Unit Trusts An Investor Guide

Table of ContentsIntroduction

U.S. Investment Companies Overview 1

A Brief History of Investment Companies 3

Basics of Unit Investment Trusts

What is a Unit Investment Trust? 4

Unit Investment Trust Life Timeline 5

Brief History of Unit Investment Trusts in the United States 6

When to Consider Unit Investment Trusts 6

How Do Unit Investment Trusts Compare? 7

The Characteristics of Unit Investment Trusts 8

Features and Benefits of Unit Investment Trusts 8

Dynamics of Unit Investment Trusts

How Unit Investment Trusts Work 10

Considerations at Trust Termination 10

Common Types of Unit Investment Trusts Explained 11

Evaluation of Unit Investment Trust Strategy Performance 14

Pricing Overview

Unit Investment Trust Sales Charges and Expenses Explained 15

Taxation

Unit Investment Trust Tax Structures 18

Unit Investment Trust Tax Treatment 20

Regulatory and Risk Considerations

Regulatory Background for Unit Investment Trusts 21

Unit Investment Trust Risk Considerations 22

Unit Investment Trust Portfolio Risk Considerations 23

Other Important Considerations 25

Appendix

Additional Resources & Unit Investment Trust Statistics 26

Glossary 27

Understanding Unit Trusts | An Investor Guide

Understanding Unit Trusts | An Investor Guide | 1

IntroductionU.S. Investment Companies OverviewFund sponsors in the United States offer four types of registered investment companies:*1

▪ Open-end mutual funds

▪ Closed-end funds

▪ Exchange-traded funds (ETFs)

▪ Unit investment trusts (UITs)

The largest segment of the asset management business in the United States is made up of registered investment companies. U.S.-registered investment companies have had significant impact on the growth of the U.S. economy and financial markets, and a growing role in global financial markets. The industry has experienced strong growth over the past quarter century from asset appreciation, strong demand from households due to rising household wealth, the aging U.S. population, and the evolution of employer-based retirement systems. Registered investment companies supplied investment capital in securities markets around the world and were among the largest groups of investors in the U.S. stock, commercial paper, and municipal securities markets.2

At the end of 2015, U.S. registered investment companies managed $18.1 trillion in assets.

Role of Investment Companies in Financial MarketsFor much of the past 20 years, investment companies have been among the largest investors in the domestic financial markets. Investment companies held a significant portion of the outstanding shares of U.S.-issued equities and money market securities at year-end 2015. Investment companies as a whole were one of the largest groups of investors in U.S. companies in 2015, holding 31 percent of their outstanding stock at year-end.4

*The terms investment companies and U.S. investment companies can also be frequently referred to as U.S. registered investment companies. U.S. registered investment companies can include open-end mutual funds, closed-end funds, exchange-traded funds, and unit investment trusts.

1 Investment Company Institute. 2016. 2016 Investment Company Fact Book: A Review of Trends and Activities in the U.S. Investment Company Industry, P. 244. Washington, DC: Investment Company Institute. Available at www.icifactbook.org.

2 Ibid., P. 7.

3 Ibid., P. 8, 10.

4 Ibid., P. 14.

2 | Understanding Unit Trusts | An Investor Guide

Investment Company Total Net Assets by TypeBillions of dollars; year-end, 1998 – 2015

Year Mutual Funds1 Closed-end funds2 ETFs3 UITs Total4

1998 $5,525 $156 $16 $94 $5,7901999 $6,846 $147 $34 $92 $7,1192000 $6,965 $143 $66 $74 $7,2472001 $6,975 $141 $83 $49 $7,2482002 $6,383 $159 $12 $36 $6,6802003 $7,402 $214 $151 $36 $7,8032004 $8,095 $253 $228 $37 $8,6132005 $8,891 $276 $301 $41 $9,5092006 $10,398 $297 $423 $50 $11,1682007 $12,000 $312 $608 $53 $12,9742008 $9,621 $184 $531 $29 $10,3652009 $11,113 $223 $777 $38 $12,1512010 $11,833 $238 $992 $51 $13,1142011 $11,632 $242 $1,048 $60 $12,9832012 $13,057 $264 $1,337 $72 $14,7302013 $15,051 $279 $1,675 $87 $17,0912014 $15,875 $289 $1,974 $101 $18,2402015 $15,652 $261 $2,100 $94 $18,107

Sources: Investment Company Institute. 2016. 2016 Investment Company Fact Book: A Review of Trends and Activities in the U.S. Investment Company Industry, P. 9. Washington, DC: Investment Company Institute. Available at www.icifactbook.org; Strategic Insight Simfund

1 Mutual fund data include only mutual funds that report statistical information to the Investment Company Institute, and do not include mutual funds that invest primarily in other mutual funds.

2 Closed-end fund data include preferred share classes.

3 ETF data prior to 2001 were provided by Strategic Insight Simfund. ETF data include investment companies not registered under the Investment Company Act of 1940 and exclude ETFs that primarily invest in other ETFs.

4 Total investment company assets include mutual fund holdings of closed-end funds and ETFs.

Note: Data are for investment companies that report statistical information to the Investment Company Institute. Assets of these companies are 98 percent of investor assets. Components may not add to the total because of rounding.


A Brief History of Investment Companies

The Origins of Pooled InvestingThe investment company concept was a European idea developed in the late 1700s, according to K. Geert Rouwenhorst in The Origins of Mutual Funds, “when a Dutch merchant and broker invited subscriptions from investors to form a trust to provide an opportunity to diversify for small investors with limited means.”5

The emergence of “investment pooling” in 19th century England brought this concept closer to the United States. In 1868, the Foreign and Colonial Government Trust formed in London and resembled the U.S. fund model in basic structure, providing “the investor of moderate means the same advantages as the large capitalists…by spreading the investment over a number of different stocks.”6

“The British fund model then established a direct link with U.S. securities markets, helping to finance the development of the post–Civil War U.S. economy. The Scottish American Investment Trust, formed on February 1, 1873, by fund pioneer Robert Fleming, invested in the economic potential of the United States, mainly through American railroad bonds. Many other trusts followed that not only targeted investments in America, but also led to the introduction of the fund investing concept o U.S. shores in the late 1800s and early 1900s.”7

In March 1924 the first mutual, or open-end, fund debuted in Boston. This investment company concept was developed by the Massachusetts Investors Trust. The investment company concept established the following features.8

▪ A simple capital structure

▪ A continuous offering of shares

▪ The ability to redeem shares rather than hold them until dissolution of the fund

▪ A set of clear investment restrictions and policies

The stock market crash of 1929 and subsequent Great Depression that followed impeded the growth of pooled investments until a succession of landmark securities laws. In order to revive investor confidence, regulations that would pioneer the investment market were passed: beginning with the Securities Act of 1933 and concluding with the Investment Company Act of 1940. Renewed investor confidence and numerous innovations led to relatively steady growth in industry assets.9

5 Source: Investment Company Institute. 2016. 2016 Investment Company Fact Book: A Review of Trends and Activities in the U.S. Investment Company Industry, P. 242. Washington, DC: Investment Company Institute. Available at www.icifactbook.org;

6 Ibid., P. 242.

7 Ibid., P. 242.

8 Ibid., P. 243.

9 Ibid., P. 243.


Basics of Unit Investment TrustsWhat is a Unit Investment Trust?A unit investment trust (“UIT” or “unit trust”) is an investment company which purchases a fixed portfolio of stocks, bonds or other securities registered with the Securities and Exchange Commission and are regulated primarily under the Investment Company Act of 1940. Unit investment trusts share similar traits to both mutual funds and closed-end funds. Like mutual funds, unit investment trusts issue redeemable shares (otherwise referred to as units), and like closed-end funds, they typically issue a specific, fixed number of shares. Unlike mutual funds or closed-end funds, unit investment trusts have a preset termination date which could be based on the portfolio’s underlying investments and/or the unit investment trust’s investment goals.10

A unit investment trust portfolio is an unmanaged investment vehicle with a static portfolio (fixed and not actively traded) of securities chosen by the sponsor (the entity that is responsible for assembling the unit investment trust) which follows a buy and hold strategy to achieve a specific objective (although, there is no guarantee the objective will be met). The securities in the portfolio are held for a specific period of time until a pre-determined termination date, at which time the portfolio will dissolve. These trusts typically range from one to 30 years depending on the type of holdings in the portfolio. Equity trusts will usually be held for one to five years and fixed income trusts can be held upwards of 30 years, or in some cases, longer.

While the securities are professionally selected and purchased based on a particular investment concept or methodology, the portfolio is not actively managed. This removes the potential for emotional reaction to market events and ensures a consistent application of the investment concept or methodology, without style or sector drift.

A unit investment trust sponsor will make a public primary offering of units to investors. Units of the trust purchased by these investors represent an ownership interest in the trust’s assets. When investors, called “unit holders”, purchase units, they typically pay initial and deferred sales charges. The units can normally be redeemed on any trading day at the current unit price.

The four main parties involved in the unit investment trust portfolio consist of the portfolio consultant, sponsor, trustee, and investor.

Four Main Parts To A Unit Investment Trust Portfolio

Unit Investment

Trust

Unit Holder

Portfolio Consultant

Trustee/ Custodian

Sponsor/ Investment

Advisor

Portfolio consultantThe portfolio consultant is a registered investment advisor selected by the sponsor to assist in the selection of the portfolio. Not all unit investment trusts utilize portfolio consultants.

SponsorThe sponsor organizes the unit investment trust and brings it to market.

TrusteeThe trustee serves as the custodian of the unit investment trust. The trustee also maintains the trust’s assets and serves as the portfolio administrator to the trust.

Unit Holder:The unit holder, or investor, owns the units of the unit investment trust.



Typically, unit investment trusts issue only a specific, fixed number of units. Unit investment trusts are like mutual funds as the units are redeemable. Unlike mutual funds, the sponsor generally maintains a secondary market to minimize depletion of the unit investment trust’s assets.

Mutual fund holdings are reported at the end of the quarter, the unit investment trust portfolio is transparent, which means that investors may know precisely which securities they own. Although the securities within the trust will generally remain fixed and unmanaged by the sponsor, the sponsor has the ability to remove a security from the trust in limited circumstances as described in the prospectus.

Unit investment trusts offer access to a diversified portfolio of stocks and/or bonds that are designed to be a simple, convenient, and affordable investment vehicle. The portfolio is selected by a financial professional so investors need not be concerned with selecting and managing the individual investments themselves. A unit investment trust may be appropriate for certain investors for a variety of reasons such as transparency, diversification, liquidity and tax efficiency.

Unit investment trusts have inherent risks. Investors should refer to the prospectus for additional details and risks specific to the respective unit investment trust and its underlying portfolio. Generally, unit investment trusts will inherit the risks of the underlying securities, and may not be appropriate for investors seeking capital preservation. There is no assurance that an individual unit investment trust portfolio will meet its objective. Unit investment trusts are not actively managed and will not be sold to take advantage of market conditions. Upon termination there is no assurance the value of the unit investment trust will be equal to or higher than the original price. The level and type of risk associated with unit investment trusts may vary significantly from one trust to another.

Unit Investment Trust Life TimelineA unit investment trust follows a defined life cycle timeline. Below is a general illustration of the lifecycle of a unit investment trust:

Life Timeline of a Unit Investment Trust

>Preliminary Offering Period

>Initial Offering Date

>Primary Offering Period

>Secondary Date

>Secondary Offering Period

Termination Date

The time period the sponsor has announced an upcoming trust de-posit, though units are unable to be sold until the trust has deposited and the registration statement filed with the Securities and Exchange Commission is effective.

The date the unit investment trust is made available for investment, and the start of the primary offering period.

The time period the sponsor offers units of the unit investment trust to investors.

The date the unit investment trust is no longer offered for sale on the primary market and the first date of the secondary period.

The period when the units are no longer offered by the sponsor. An investor purchases a unit from anoth-er investor rather than the issuer, subsequent to the original issuance in the primary market.

The pre-determined date the unit invest-ment trust reaches maturity and is con-sidered terminated. The date the unit investment trust is dissolved, and the proceeds for the value of these units are paid to shareholders.


Brief History of Unit Investment Trusts in the United StatesIn 1961, the first unit investment trust consisting of tax-free bonds was introduced, and historically, most unit investment trust offerings were predominately bond portfolios. As equity assets have gained popularity over the past two decades, they surpassed fixed income assets in 1998, including taxable and tax-free unit investment trusts and constituted 85% of the assets in unit investment trusts in 2014, the highest share ever recorded. Since the first unit investment trust, the unit investment trust market has changed. The majority of products in the market today focus on quantitative strategies, asset allocation, thematic sectors and income generation. Unit investment trusts generally include two categories: equity trusts and fixed income trusts. An equity trust can focus on domestic, international or a combination of both. A fixed income trust is classified as taxable or tax-free. From the late 1990s through the mid-2000s, the total number of outstanding unit investment trusts fell due to the dissolution of trusts at termination and fewer trusts being created by sponsors.11 New unit trust deposits totaled $66 billion in 2015,which remain unchanged from last year.12

Total Net Assets and Number of Unit Investment Trusts (Year-end, 2000-2015)13

0

Num

ber of Trusts

0

20

40

60

80

100

120

140

160

Billi

ons

of D

olla

rs

3,000

6,000

9,000

12,000

15,000

2015201420132012201120102009200820072006200520042003200220012000

Tax-Free Debt Trust Assets Equity Trust Assets

Total Trusts Taxable Debt Trust Assets

10,072 5,188

74

49

36 36 37 4150 53

29

38

5160

72

87

101

48 26 15 19 23 29 39 43 20 25 34 41 52 71 86

4

4

4 3 32

2 2

24

44

4

4

3

23

19

17 13 11 109 6

6

10

1316

16

12

12

80

31194

Note: Components may not add to the total because of rounding.

When to Consider Unit Investment TrustsThere is an extensive selection of unit investment trusts available today with different investment objectives and levels of diversification and risk. For this reason, unit investment trusts may be suitable for a wide range of investors. Unit investment trusts are a convenient and affordable investment that provides the liquidity many investors need, while also offering consistency and transparency. Since investments within the unit investment trust portfolio rarely change, an investor knows what securities a portfolio will likely hold over the life of the investments, making it easy to track the performance of the portfolio.

Before investing, Investors should always consider whether a unit investment trust’s investment objectives are compatible with their risk tolerance, time horizon, and long-term investment goals.


12 Ibid., P. 10.

13 Ibid., P. 21.


How Do Unit Investment Trusts Compare? Like many mutual funds, unit investment trusts may offer a diversified portfolio of securities that are selected by professional investment managers either at the unit investment trust sponsor, a third party investment manager, or a research firm. Unlike mutual funds, a unit investment trust is not actively managed. In other words, securities in the trust will generally not be sold or replaced in an effort to improve the trust’s net asset value. For this reason, annual operating expenses for unit investment trusts may be lower than those of actively managed mutual funds.

The chart below provides a snapshot of some of the features and benefits of unit investment trusts and how they compare to other common investment products.

Comparison of Common Investment Products1

Individual Securities

Exchange- Traded Funds2

Mutual Funds3

Closed-End Funds

Unit Investment Trusts

Defined Portfolio Yes Yes No No YesDaily Liquidity4,5 Yes Yes Yes Yes YesProfessional Selection Sometimes No Yes Yes YesAutomatic Reinvestment Options Sometimes6 No Yes Sometimes Yes

Professional Supervision No Yes Yes Yes YesSales Charges, Fees and/or Expenses7 Yes Yes Yes Yes Yes

Fully Invested8 Yes Yes Sometimes Yes YesManaged Portfolio No No Yes Yes NoDiversification9 No Yes Yes Yes YesDistribution In-Kind10 Yes No No No Yes

1 The characteristics shown are not all inclusive and represent general attributes of typical investments of the types indicated. Unit trusts, exchange-traded funds, mutual fund, closed-end funds and individual securities are different types of investment vehicles with different expense structures and different inflows/outflows and distribution requirements. Please refer to the prospectus for more information.

2 Exchange-traded funds structured as open-end funds or unit investment trusts.

3 Mutual funds refer to typical open-end funds.

4 Like most financial products, a liquid secondary market cannot be guaranteed. Individual securities and ETFs trade throughout each business day while mutual funds and unit trusts typically trade as of the close of business each business day.

5 Investment return and principal value will fluctuate and units/shares, when redeemed/sold, may be worth more or less than the original purchase price. Units may be redeemed on any business day at the current market value less any remaining deferred sales charge.

6 Only available for companies with dividend reinvestment plans.

7 There are costs associated with an investment in each type of security.

8 Unit investment trusts and exchange-traded funds may periodically hold limited cash positions.

9 Diversification does not assure a profit or protect against loss.

10 Unit investment trust investors may generally request an in-kind distribution of the stocks underlying the units if certain minimum requirements are met. ETFs typically offer distribution in-kind only for institutional-sized redemptions.


The Characteristics of Unit Investment TrustsUnit investment trusts have a specific investment objective. The securities in a unit investment trust are professionally selected to meet the stated investment objective of the trust (e.g., income, capital appreciation, or a combination of the two). Federal laws require unit investment trusts to have a largely fixed portfolio. Therefore once the trust’s portfolio is selected, its composition may change only in very limited circumstances as described in the unit investment trust’s prospectus. Unit investment trusts are not actively managed and the securities in the portfolio are not actively traded. Therefore, they can be considered a tax efficient investment and normally do not have embedded capital gains when an investor purchases units.

Because a unit investment trust portfolio is defined and not actively managed, there is typically no style drift as a result of manager-driven trading and active fund management as may be the case with managed funds.

Unit investment trusts are required to provide daily pricing. Investors may obtain unit investment trust price quotes from brokerage or investment firms, investment company websites, or NASDAQ’s Mutual Fund Quotation Services.14

A few broker-dealers offer proprietary unit investment trusts or sell trusts offered by independent sponsors. Units can be purchased either from the registered representatives of investment firms which sell trusts sponsored by their broker-dealer or third-party brokerage firms.

Some unit investment trust sponsors maintain a secondary market for units in which investors can sell their units back to the sponsor and other investors can buy those units. Even absent a secondary market, unit investment trusts offer daily liquidity and are required by law to redeem outstanding units at their net asset value (NAV) (minus any remaining sales charges), which is based on the underlying securities’ current market value.15

Features and Benefits of Unit Investment Trusts Ease of OwnershipUnit investment trusts require a low minimum purchase amount. With a single purchase, investors may own a professionally selected portfolio of securities without making a substantial time or capital commitment.

Professional Portfolio DesignUnit investment trusts provide specific portfolios that are professionally selected by either the unit investment trust sponsor or a third party research or investment firm to pursue a stated investment objective. A team of experienced professionals researches and selects securities they believe will best meet the goals established for each portfolio through various techniques, which may include database screening, fundamental analysis and/or technical analysis.


15 Ibid., P. 21.


TransparencyA unit investment trust buys a portfolio of securities that generally remains fixed for the life of the unit investment trust, enabling investors to know exactly what they own for the duration of the investment. Under limited circumstances, individual securities may be sold at the sponsor’s discretion in response to material adverse credit or other negative factors.

DiversificationUnit investment trusts typically consist of a diversified basket of securities allowing investors to diversify risk without the capital commitment and time it would require to achieve this type of diversification on their own. Unit investment trust portfolios may be diversified across many security types, although the level of diversification may vary depending upon the portfolio. Diversification does not ensure a profit or protect against loss.

Fully InvestedUnit investment trusts hold limited cash positions. Therefore, more of the investor’s money can be invested in the market.

Daily LiquidityUnit investment trusts are required by law to allow investors to redeem their units on any business day at the redemption or liquidation price, which is based on the current market value of the underlying securities and may be more or less than the original purchase price.

Defined TermUnit investment trusts have a predetermined investment life with a specified termination date which provides regular opportunities to review and evaluate an investor’s current investment needs. Studies have shown that rebalancing can provide benefits to an investor’s long-term investment plan. Additionally, the daily redemption feature provides flexibility to meet an investor’s needs.

Potentially Lower Cost:Unit investment trust portfolios are generally fixed which may result in lower trading costs. This, combined with no management fees, may make a unit investment trust a lower-cost alternative to other investment choices. Investors should consider the fees associated with unit investment trusts including, but not limited to, initial and deferred sales charges, operating expenses and creation and development fees.

Professional OversightUnit investment trust portfolios are regularly reviewed by professional investment analysts for material negative credit events (described in the prospectus) that may adversely affect securities held in the portfolio as well as regular corporate actions that may require changes to the portfolio.


Dynamics of Unit Investment TrustsHow Unit Investment Trusts Work

Buying trust unitsA sponsor will offer a specific amount of units during the purchase period (also commonly referred to as the primary offering period). This purchase period typically lasts anywhere from one day to six months.

▪ Units of a unit investment trust can often be bought for as little as $1,000 (or $250 for an IRA and depending on the sponsor or broker-dealer). Owning a unit of the trust means the investor owns a proportional share of all the securities within the unit investment trust portfolio. As such, unit investment trusts offer investors a considerably lower-cost alternative to replicating the portfolio by purchasing individual securities on their own.

Selling trust unitsAn investor can redeem units of the unit investment trust back to the sponsor any time prior to the trust’s termination at net asset value less any remaining deferred sales charges. Some unit investment trusts will resell those redeemed units to other investors. The proceeds from the redemption will normally be credited to the investor’s account three business days after the sale (trade date + 3).

▪ In addition and subject to certain requirements, certain unit investment trusts allow investors to elect to receive their pro-rata shares in-kind. Depending on the structure of the unit investment trust, this may create a taxable event.

Considerations at Trust TerminationUnit holders have different options when the trust terminates. The most common include depositing cash proceeds into their account or reinvesting in another trust, if available, at a reduced sales charge. Unit investment trust sponsors generally offer a successive series of each unit investment trust after the primary trust is no longer offered (commonly referred to as “going secondary”). The offering period for each new series coincides with a prior series’ termination, allowing an investor to reinvest or purchase a successive series of a unit investment trust with the same objective or strategy. This new series will have a new portfolio selected to meet the investment objective. Investors may also reinvest the termination proceeds from a unit investment trust into a unit investment trust with a different investment strategy.

Unit investment trust sponsors generally provide sales charge discounts for clients who choose to reinvest the proceeds from one unit investment trust into another unit investment trust within the sponsor’s unit investment trust primary offerings. In addition, unit investment trust sponsors generally offer sales charge discounts on proceeds reinvested from another sponsor’s unit investment trusts.


Three Options for Investors at Trust Termination

1 Rollover

Unit investment trust sponsors may provide rollover pricing discounts or reduced sales charges for unit investment trust units purchased with proceeds from a termination or sale of another unit investment trust, if used within 30 days of termination to purchase a new unit investment trust.. Sponsors-allow investors to aggregate rollover funds with new money to obtain a reduced sales charge on the new-money purchase (subject to certain requirements) or the rollover amount, if applicable.

2 Receive Cash

If no other instructions are received from the investor by the trust’s termination date, the investor will automatically receive cash in their account for their units.

3 In-Kind Distribution

Certain unit investment trusts may allow eligible investors to receive a distribution of the shares of securities held within the unit investment trust. This option is only available when certain requirements, as defined in the prospectus, are met.

Common Types of Unit Investment Trusts Explained

Equity Unit Investment Trust PortfoliosEquity unit investment trust portfolios consist of domestic and/or foreign stocks selected for their potential to provide total return (capital appreciation and/or dividend income). These trusts follow a buy-and-hold strategy and typically have stated termination dates that range from one to five years, depending on the investment objective. The following are among the most common types of equity unit investment trusts:

▪ Quantitative (strategy) ▪ Market cap or style

▪ Economic or geographic sector ▪ Income

▪ Thematic ▪ Asset allocation

A quantitative trust follows a predetermined investment strategy. Quantitative portfolios are typically generated from a defined universe of stocks, such as a major market index. The strategies seek to outperform relevant indexes or benchmarks by selecting securities using strategies that reflect the historical behavior of the securities. One or more screening methods (such as sales growth, dividend yield, or profitability) are applied to produce a portfolio which meets certain parameters.

Quantitative strategies adhere to a rules-based stock selection methodology and may show hypothetical back-tested (or historical market) performance. This information may help investors decide if the investment strategy might be appropriate for their investment objectives and goals. Most importantly, investors must understand that an investment’s past performance is not indicative of its future performance. The rules-based strategy dictates which securities are chosen for the portfolio, which generally remains the same for the life of the unit investment trust. An investor should consider his or her ability to participate in successive trust series because most strategies are focused on a long-term investment horizon.


Some unit investment trust portfolios provide exposure to a specific sector, which can either be economic (such as healthcare, technology, or financial stocks) or geographic (either region or country-specific) focused. Sector portfolios seek to provide capital appreciation by identifying market trends in specific sectors or industries and investing in the companies of these sectors or industries that the sponsor feels are best-positioned to potentially benefit from those trends.

Unit investment trust portfolios may also be theme-based. For example, a global infrastructure portfolio can encompass stocks from a range of countries and sectors, with the common theme that the companies are involved with some type of infrastructure activity. Another example may be a unit investment trust portfolio composed of companies believed to be market leaders within technology, energy or water conservation, or it may be based on a common theme such as the migration of the U.S. population toward the southern states.

Market cap (small-, mid-, or large-cap) or investment style (value, growth, or blend) can also be the basis of a unit investment trust portfolio. In these portfolios, the unit investment trust would be designed to provide specific exposure to companies of a designated size or style.

Unit investment trust portfolios may originate from several sources. In some instances, the unit investment trust sponsor designs the portfolio and selects the securities using internal resources and expertise. In other instances, the sponsor may engage an external firm to provide specific expertise or a particular investment strategy. These firms are generally referred to as portfolio consultants.

Potential applications for equity unit investment trust portfolios include:

▪ When constructing a portfolio, certain equity unit investment trusts might constitute a “core allocation.” For instance, one core allocation may be a quality, broad-based large-cap unit investment trust, which serves as the foundation for the investor’s overall portfolio.

▪ Once the foundation is established, other unit investment trusts may provide a complimentary or “satellite allocation”. For example, if the investor is particularly interested in a specific sector or theme, such an allocation would be more targeted to a client’s unique needs or objectives.

▪ Additional equity unit investment trust portfolios may provide the client with enhanced portfolio diversification and potentially decrease overall portfolio volatility.

Fixed Income Unit Investment Trust PortfoliosA common element of most fixed income unit investment trusts is the potential income stream these portfolios may generate. Within the fixed income segment there are wide ranges of portfolios that may satisfy the needs of different types of investors, with the basic distinction being tax-exempt or taxable portfolios.

Common security choices for fixed income unit investment trusts include, but are not limited to, corporate bonds, international bonds, state municipal bonds, government securities and mortgage-backed securities.

Some of the earliest and most prevalent fixed income unit investment trusts are those that are tax-exempt on some level. These unit investment trusts are normally composed of municipal bonds issued by states, localities, various municipal government agencies and other entities. The interest generated by the bonds held in these types of portfolios is generally exempt from federal and, in some cases, state and local income taxes.

Taxable fixed income unit investment trusts are typically composed of corporate, government agency or certain municipal bonds which, for various reasons, do not enjoy tax exemption at the federal level. In some cases, the interest generated by these bonds may be exempt from state or local taxes. Taxable fixed income unit investment trusts typically generate higher levels of income when compared to similar tax-exempt unit investment trusts.


Fixed income unit investment trusts composed of bonds may include investment grade bonds or potentially non-investment grade. Many fixed income securities are assigned credit quality ratings by credit agencies. These ratings range from “AAA” (highest quality) to “BBB” for investment grade securities. Ratings below BBB are considered non investment grade. Generally speaking, the lower the credit rating on a security, the higher the security’s yield and inherent risk.

Moody's S&P Fitch

Aaa AAA AAA Investment GradeAa1 AA+ AA+ Investment GradeAa2 AA AA Investment GradeAa3 AA- AA- Investment GradeA1 A+ A+ Investment GradeA2 A A Investment GradeA3 A- A- Investment Grade

Baa1 BBB+ BBB+ Investment GradeBaa2 BBB BBB Investment GradeBaa3 BBB- BBB- Investment GradeBa1 BB+ BB+ Non-Investment GradeBa2 BB BB Non-Investment GradeBa3 BB- BB- Non-Investment GradeB1 B+ B+ Non-Investment GradeB2 B B Non-Investment GradeB3 B- B- Non-Investment Grade

Caa1 CCC+ CCC Non-Investment GradeCaa2 CCC Non-Investment GradeCaa3 CCC- Non-Investment Grade

Ca Non-Investment GradeC D Any D Default

Sources: Moody’s, S&P, Fitch.

Other fixed income unit investment trusts are composed of “insured” bonds, in which the payment of bond interest and principal is guaranteed by a third party insurer. Bonds held in these unit investment trusts may carry the highest “AAA” quality rating, and usually generate lower levels of income compared with unit investment trusts composed of un-insured securities.

Certain municipal fixed income unit investment trusts are “state-specific”, where all of the bonds in the trust portfolio are issued by issuers in the same state. These trusts typically appeal to investors who reside in the given state because of the potential benefit of income tax exemptions on the interest received. In other instances, investors might be familiar with the issuers held in a state specific portfolio.

Fixed income portfolios are typically diversified by issuer type. For example, a state-specific trust will typically hold bonds issued by a range of issuers. Issuers may include local governments, school districts, hospitals, municipal utility systems and toll roads. Broad-based unit investment trust portfolios may also be geographically diversified with regard to portfolio holdings.

Fixed income unit investment trusts are constructed to cover a range of investment terms. Some of the most popular structures are short-term (with an investment life of less than 5 years); intermediate (with an investment life approximately 10-15 years); and long-term (with an investment life of 20 or more years). Generally, trusts with longer maturities generate higher levels of income but may also carry a higher level of risk.


Evaluation of Unit Investment Trust Strategy PerformanceAs previously noted, a quantitative unit investment trust follows a predetermined investment strategy that adheres to a rules-based stock selection process and may show hypothetical back-tested performance. This is achieved by applying the unit investment trust’s quantitative strategy selection process at historical periods (typically applied at the beginning of every calendar year), thus recreating a type of proxy for how the trust would have performed based on historical holding and market data.

Hypothetical performance of a unit investment trust strategy typically reflects the trust’s sales charges (full sales charge in the first year, and reduced sales charge thereafter), organizational costs, and the estimated annual operating expenses, but not taxes or brokerage commissions on stocks.

Unit investment trust strategy hypothetical performance is typically based on the assumption that the portfolio reconstruction would have occurred annually. Actual unit investment trust returns will vary from the hypothetical performance strategy returns due to timing differences and because the unit investment trust may not be fully invested at all times. In any given year, the unit investment trust may lose money or underperform the benchmark index and may produce negative results. The hypothetical performance of a unit investment trust is the retroactive application of the strategy designed with the full benefit of hindsight.

Unit investment trust hypothetical strategy performance is typically compared to an unmanaged benchmark index, which is used to generally represent a specific securities market. Indexes are statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index. Similar to the hypothetical performance of a unit investment trust strategy, the historical performance of any index shown is for illustrative purposes only, and not meant to forecast, imply, or guarantee the future performance of any particular investment or any unit investment trust, which will vary. Securities in which a unit investment trust invests may differ than those in the indexes.

Hypothetical returns of a unit investment trust strategy in certain years may be significantly higher than the returns of a benchmark index. Investors must keep in mind that double-digit and/or triple-digit returns are highly unusual and cannot be sustained. Investors should also be aware that these hypothetical returns were primarily achieved during favorable market conditions or are the result of certain market factors and/or events which may not be replicated in the future. There is no guarantee any unit investment trust strategy will outperform a benchmark index.

When a quantitative unit investment trust illustrates hypothetical performance of a strategy, investors need to understand that this is not actual trust performance and that the hypothetical past performance of a unit investment trust strategy shown is not indicative of the unit investment trust’s future performance and there is no guarantee of future results.


Pricing OverviewUnit Investment Trust Sales Charges and Expenses ExplainedThere are fees and expenses associated with purchasing and owning unit investment trusts. The following will provide a general overview of typical unit investment trust fees and expenses; however you should always review a prospectus for more detailed information as fees and expenses may vary for each trust.

The unit investment trust prospectus includes a fee table that lists investor fees (or charges) including an initial sales charge, a deferred sales charge, a creation and development fee, organizational costs, and an annual trust operating expense.

Common Fees and Expenses of a Unit Investment Trust

Sales Charge Other Operational Expenses ▪ Upfront sales charge

▪ Deferred sales charge

▪ Creation and Development Fee

▪ Organizational costs

▪ Annual operating expenses

When purchasing a unit investment trust, most investors will incur a sales charge. There are several means to which the sales charge might be collected. These include, but are not limited to, either “up-front” or “initial” (paid at the time of purchase), deferred, or a combination of initial and deferred. Sales charges provide compensation for the unit investment trust sponsor, the broker-dealer, and the financial advisor.

A deferred sales charge (DSC), is collected in installments. If an investor elects to redeem their units before the DSC is fully collected, the investor is responsible for the remaining DSC. The balance will be deducted from the price that the client receives at the time of sale. The amount and installments of the deferred sales charge, if applicable, will differ based on the trust and sponsor. For example, equity trusts may be structured to charge the trust assets a specific portion of the deferred sales charge over a period of three to six consecutive months, which will reduce the trust’s NAV by the amount of the DSC.

Equity trusts may include a creation and development (C&D) fee within the sales charge. The C&D fee is designed to compensate the unit investment trust sponsor for the costs of creating and developing the unit investment trust. This fee is normally imposed at the end of the primary offering period and paid from the trust assets.

Investors who purchase unit investment trusts in an advisory or fee account may qualify for a reduced sales charge. In those accounts, the customer pays only the C&D portion of the sales charge. This discount typically applies during the initial offering period of a trust. Rather than paying the initial and deferred sales charges, clients in advisory or fee accounts pay an annual fee billed by their broker-dealer. This fee is based on a specified percentage of the account’s eligible securities. Clients in advisory or fee accounts will pay the creation and development fees, organizational costs and annual trust operating expenses of the unit investment trust.

Volume discounts (also called breakpoint discounts) are available for unit investment trust purchases above certain thresholds. Unit investment trust sponsors offer discounts on the front-end sales charge for larger investments. Breakpoints generally apply to unit investment trusts bought from the same sponsor, on the same day, through the same broker-dealer. Unit investment trust sponsors also allow investors to aggregate holdings in related accounts (also referred to as household accounts) to obtain a breakpoint discount.


Example of Typical Breakpoint Discounts for a 15-month Equity Unit Investment Trust

Purchase Amount Maximum Sales Charge

$0 to $50,000 2.95%$50,000 up to $99,9999 2.70%$100,000 up to $249,000 2.45%$250,000 up to $499,999 2.10%$500,000 up to $999,999 1.95%$1,000,000+ 1.40%

Unit investment trust sponsors may also allow rollover funds to be aggregated with new money. In order to obtain a reduced sales charge on the new money purchase or the rollover amount (if applicable), the total purchase is subject to certain requirements.

Example: Aggregating Unit Investment Trust Purchases

New Money0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

Rollover Money Aggregated

Breakpoint Level

An additional purchase of units aggregated with a rollover purchase may be entitled to a quantity-based discount.

There are discounts available when purchasing unit investment trusts with the proceeds of another unit investment trust (rollovers or exchanges). Unit investment trust sponsors offer reduced sales charges for units purchased with termination proceeds from a previous series of the unit investment trust strategy or from redemption proceeds from other unit investment trust strategies. (See rollover option under Three Options for Investors at Termination in the Dynamics of Unit Investment Trust section). This discount is typically a 1.00% reduction in sales charge. Unit investment trust sponsors will usually offer this reduction for exchanges between unit investment trusts from the same or different sponsors.

If an investor is making use of the rollover discount, that investor will not be able to take advantage of the breakpoint discounts described above unless the quantity-based discount provides a better available price.


Sales charge structures differ depending upon the type and term of the unit investment trust. A popular equity trust structure is a 15-month term, which usually carries a maximum sales charge of 2.95%. Other common equity trust structures include 24- and 60-month terms. These structures impose a slightly higher sales charge. The application of these charges may vary depending on factors including: the sponsor, the length of the unit investment trust, and whether the unit investment trust is an equity trust or a fixed-income trust.

Fixed income trusts may be:

▪ Short-term (with an investment life of less than 5 years)

▪ Intermediate (with an investment life between 10-15 years)

▪ Long-term (with an investment life of 20 or more years)

Sales charges on fixed income trusts generally range from 2%-5%, depending on the trust term.

In addition to the sales charges, there are annual operating expenses associated with owning unit investment trusts. Such expenses include, but are not limited to, a trustee fee, sponsor supervisory fee, evaluator fee, bookkeeping and administrative fee, and other operating expenses that are paid from the trust’s assets. Since unit investment trusts are generally fixed, they do not incur management fees.

Equity and fixed income trusts may collect organization costs. These costs reimburse the unit investment trust sponsor for the costs of creating the unit investment trust, including preparation of legal documents, registration fees and the fees and expenses of the trust. During the initial offering period of a unit investment trust, a portion of the purchase price is allocated to cover these organization costs, which then reimburse the sponsor at the end of the offering period.

Understanding a unit investment trust’s fee structure, including sales charges, expenses, and breakpoint discounts, help investors determine:

1 Whether an investment may be appropriate for them

2 Whether they are entitled to purchase units at a lower price

3 How many units they have the ability purchase

Below is an illustration of how common unit investment trust sales charges are calculated.

Common Unit Investment Trust Sales Charges

Initial Purchase of $10,000

+Upfront

Sales Charge 1%:

($100)

+Deferred

Sales Charge 1.45%:($145)

+Creation &

Development0.50%($50)

➞Total Sales

Charge2.95%($295)

Hypothetical example of a 15-month unit investment trust sales charge, based on a $10.00 unit.


TaxationUnit Investment Trust Tax StructuresThere are two basic tax structures that unit investment trusts utilize, either a regulated investment company (RIC) or a grantor trust. For reference, mutual funds and exchange traded funds typically utilize the RIC structure.

RICs are considered a corporation for Federal Income Tax purposes. Investors in a unit investment trust (or other investment vehicle established as a RIC) are deemed to own shares of the RIC, not the underlying portfolio securities. Therefore, tax reporting and taxability are accounted for at the trust level and are reported to the unit holders of record for their personal tax reporting. Cost basis is determined by the cost of the units, it is not directly derived from the cost of the assets held in the trust. Distributions to the unit holder are classified as ordinary dividends or capital gains. In-kind distribution of portfolio securities upon redemption of units or trust termination is generally considered a taxable event.

RICs have some flexibility in terms of the frequency of distributions to unit holders, and will set distributions depending upon the nature of the specific unit investment trust. For instance, income-oriented unit investment trusts that utilize the RIC structure may be set up for monthly distributions. Growth-oriented RIC unit investment trusts, which typically generate less income, may distribute quarterly or semi-annually. In order to qualify as a RIC, a unit investment trust portfolio must meet certain diversification requirements. Unit investment trusts that do not meet the diversification requirements of a RIC can be established as grantor trusts.

Grantor trusts are set up so that investors hold proportionate ownership interests in the underlying portfolio securities. Taxability is taken into account at the unit holder level. In contrast with RIC tax reporting, each security held in a grantor trust must be tracked separately and will be reported to the unit holders of record for their personal tax reporting. Whenever a unit holder redeems units and the sponsor disposes of the underlying securities, there is a taxable event for all unit holders. Further, any dividends or other distributions that take place within the trust are taxable at occurrence rather when they are actually distributed to the unit holder. Distributions from a trust pass through to unit holders as interest, ordinary dividends or return of principal. In-kind distributions are generally not deemed to be a taxable event.

Grantor trusts are required to make income distributions monthly. The distributions may be uneven from month-to-month depending on the amount and frequency of payment from the underlying securities in the unit investment trust portfolio.

Clients should contact a qualified tax advisor prior to making investment decisions.


Unit Investment Trust Tax Structures

Regulated Investment Company Grantor Trust

Common Investment Products

▪ e.g., mutual funds, exchange-traded funds (ETFs), unit investment trusts (UITs)

▪ e.g. exchange-traded funds (ETFs), unit invest-ment trusts (UITs)

Entity tax structure ▪ Corporation ▪ Pro-rata Investor ownership interests of underlying securities

Tax reporting ▪ Reported at trust level

▪ Reported to unit holders based on the earn-ings and profits of the corporation (trust)

▪ Reported at unit holder level

▪ Each security of the trust portfolio reported separately to unit holder

▪ Distributions passed through to unit holder

Reclassification of declarations

▪ Income and/or principal distribution to unit holder

▪ Year-end

▪ Qualified dividend income, return on capital, long-term/short-term capital gain

▪ Income and/or principal distribution to unit holder

▪ Year-end

▪ Qualified dividend income, return on capital, long-term

Cost basis ▪ Cost of units ▪ Cost of underlying securities

Distributions ▪ Ordinary dividends

▪ Capital gains

▪ Ordinary dividends

▪ Interest

▪ Return of principal

In-kind distributions ▪ Taxable event ▪ Non-taxable event

Distribution frequency ▪ Depends on nature of unit investment trust

▪ Monthly, quarterly, annually, semi-annual

▪ Income distribution requirement

▪ Monthly

Diversification ▪ Subject to diversification and gross income qualification tests

▪ Not subject to the qualification tests

Security Removal ▪ Removal and replacement of securities for credit reasons and to ensure compliance with diversification requirement

▪ Removal of securities for credit reasons, not sold in response to market fluctuation

Source: BNY Mellon, Unit Investment Trust, Tax Reporting Guide for Tax Year 2013.


Unit Investment Trust Tax TreatmentInvestors in the trust units are subject to taxes on their investments and may realize a taxable gain or loss, either short term or long term, on their federal tax returns when units are redeemed at or prior to termination of the unit investment trust. Investors are also responsible for taxes on distributions from the trust including dividends, interest, and principal distributions, though there is no guarantee any distributions will be made. When a unit holder elects to utilize the rollover feature and reinvest the proceeds from one unit investment trust into another unit investment trust, it is considered a taxable event, and investors may realize a gain or loss and should be reported on their income tax returns. For individual retirement accounts (IRAs) and other tax-deferred accounts, taxes on capital gains and income received are deferred until distributions from the account are made to the account holder. Non-U.S. residents who invest in unit investment trusts may be subject to special tax withholding and reporting requirements.

Investors in unit investment trusts should be aware that there may be complex tax-reporting requirements associated with their investment. If investors have questions regarding taxes associated with their investment in a unit investment trust, or for information regarding the alternative minimum tax (AMT), nonresident aliens, or state or foreign withholdings, they should read the unit investment trust prospectus and/or contact a tax advisor or attorney.

Regulated Investment Company (RIC) and grantor unit investment trusts are subject to distribution reclassification from income and/or principal received by the trust, meaning that the trustee directed by the sponsor of the trust will reclassify declarations of income paid during the previous tax year. These declarations will generally be reclassified as qualified dividend income, return of capital, long or short term capital gains. This reclassification of income may result in a beneficial tax change to the investor. Therefore, it is important for an investor in a unit investment trust to consider the reclassification when determining the timing of filing their taxes.


1 Source: Investment Company Institute. 2016. 2016 Investment Company Fact Book: A Review of Trends and Activities in the U.S. Investment Company Industry, P. 243. Washington, DC: Investment Company Institute. Available at www.icifactbook.org.

Regulatory and Risk ConsiderationsRegulatory Background for Unit Investment Trusts“Unit investment trusts, like mutual fund and closed-end funds, are subject to stringent federal laws and oversight by the U.S. Securities and Exchange Commission (SEC). The Investment Company Act of 1940 is highly detailed and governs this structure and day-to-day operations of the funds”.

Unit investment trusts are regulated under the Investment Company Act of 1940 and the rules adopted under the Act, Section 4 and Section 26.

Before investing in any registered investment company, such as a mutual fund, closed-end fund or unit investment trust, investors should read the portfolio’s prospectus and any other available information on the investment.

An investment company prospectus details important information about fees and expenses, investment objectives, investment strategies, risks, performance, pricing, and more. A unit investment trust prospectus will list the securities the unit investment trust holds. When an investor purchases shares of a mutual fund or a unit investment trust, the fund or unit investment trust must provide the investor with a prospectus.

Investors can obtain all of these documents from:

▪ The investment company’s website

▪ A financial advisor that sells the investment company’s shares

▪ The SEC’s EDGAR database

Four Principal Securities Laws Govern Investment Companies

The Investment Company Act of 1940 Regulates the structure and operations of investment companies through a combination of registration and disclosure requirements and restrictions on day-to-day operations. The Investment Company Act requires the registration of all investment companies with more than 100 investors. Among other things, the Act addresses investment company capital structures, custody of assets, investment activities (particularly with respect to transactions involving potential conflicts of interest), and the duties of fund boards.

The Investment Advisers Act of 1940 Regulates investment advisers. Requires all advisers to registered investment companies and other large advisers to register with the SEC. The Advisers Act contains provisions requiring fund advisers to meet recordkeeping, custodial, reporting, and other regulatory responsibilities.

The Securities Exchange Act of 1934 Regulates the trading, purchase, and sale of securities, including investment company shares. The 1934 Act also regulates broker-dealers, including investment company principal underwriters and others that sell investment company shares, and requires them to register with the SEC. In 1938, the Securities Exchange Act of 1934 was revised to add Section 15A, which authorized the SEC to create self-regulatory organizations. Pursuant to this authority, in 1939 a self-regulatory organization for broker-dealers—which is now known as the Financial Industry Regulatory Authority (FINRA)—was created. Through its rules, inspections, and enforcement activities, FINRA, with oversight by the SEC, continues to regulate the conduct of broker-dealers, thereby adding another layer of protection for investors.

The Securities Act of 1933 Requires the registration of public offerings of securities, including investment company shares, and regulates such offerings. The 1933 Act also requires that all investors receive a current prospectus describing the fund.


Unit Investment Trust Risk Considerations

Structure Portfolio Additional Risks/Information ▪ Investment strategy risk

▪ Complex investment strategy risk

▪ Market risk

▪ Non-active management risk

▪ Term risk

▪ Inflation risk

▪ Dilution risk

▪ Liquidity risk

▪ Common stock risk

▪ Growth style risk

▪ Value style risk

▪ Small- and mid-cap risk

▪ Concentration risk

▪ Country risk

▪ Diversification risk

▪ Foreign risk

▪ Emerging markets risk

▪ Exchange-traded fund risk

▪ Closed-end fund risk

▪ Fixed income risk

▪ Below investment grade risk

▪ Performance risk

▪ Insurance risk

▪ Fees and expenses risks

The following list includes common risks or characteristics associated with unit investment trusts. It should not be considered a complete list of all possible risks associated with unit investment trusts currently available in the marketplace.

Investment Strategy RiskA unit investment trust is exposed to additional risk due to its policy of investing in accordance with an investment strategy. Although the trust’s investment strategy is designed to achieve the investment objective, there is no assurance that a unit investment trust will achieve its investment objective. The trust also may not perform as expected.

Complex Investment Strategy RiskCertain unit investment trusts utilize complex and specialized investment strategies. They commonly invest in alternative investments such as commodities, foreign currencies and derivatives, or narrowly focused portfolios of non-traditional equity baskets. Complex investment strategies are subject to a number of risks including increased volatility and greater potential for loss, and are not suitable for all investors.

Inflation Risk An investment in a unit investment trust is subject to inflation risk, which is the possibility the value of assets or income from investments, will be less in the future as inflation decreases the value of money. If inflation (the cost of goods or services) outpaces the investment growth, the real value of the units may not have the same purchasing power than at the time of investing, therefore the value of the units of a trust may decline as a result of inflation.

Market Risk An investment in a unit investment trust is subject to market risk, which is the possibility that the market values of securities owned by the trust will decline and that the value of trust units may therefore be less than what an investor paid for them. Market value fluctuates in response to various factors including stock market


movements, purchases or sales of securities by the trust, government policies, litigation, changes in interest rates, inflation, and the financial condition or perception of the securities’ issuer. Accordingly, investors can lose money investing in a trust.

Non-Active Management Risk The sponsor does not actively manage the portfolio of a unit investment trust. Securities are only bought and sold in limited circumstances. A trust will generally hold, and may continue to buy, the same securities even though a security’s outlook, rating, market value or yield may have changed. The value of your investment may fall over time.

Term Risk Short term strategy trusts should be considered as part of a long-term investment strategy and investors should consider their ability to pursue investing in successive portfolios at the applicable sales charge, if available. There may be tax consequences associated with an investment from one series to the next unless units are purchased in an IRA or other qualified tax-deferred account. Investors should consult their tax advisor or attorney to determine tax consequences associated with an investment from one portfolio to the next.

Dilution Risk As the sponsor sells units, the size of a trust will increase. The sponsor will seek to replicate the existing portfolio. When a trust buys securities, it will pay brokerage or other acquisition fees. Existing unit holders could experience a dilution of their investment (because of these fees and fluctuations in security prices between the time the sponsor creates units and the time a trust buys the securities). The sponsor cannot guarantee that the trust will keep its present size and composition for any length of time.

Liquidity Risk A unit holder may be subject to liquidity risk if the sponsor does not maintain a secondary market for a trust; however, a unit holder who does not dispose of units in the secondary market may cause units to be redeemed by the trustee.

Unit Investment Trust Portfolio Risk Considerations

Common Stock Risk Certain unit investment trust portfolios invest in common stocks. Market value of stocks fluctuates in response to various factors including stock market movements. Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors and the amount of any dividend may vary over time. An issuer of a security may be unable or unwilling to make dividend payments, which may decrease the value of the units of the trust.

Growth Style Risk Certain unit investment trust portfolios invest in growth style stocks. Growth stocks are issued by companies which, based upon their higher than average price/book ratios, are expected to experience greater earnings growth rates relative to other companies in the same industry or the economy as a whole. Securities of growth companies may be more volatile than other stocks. If the perception of a company’s growth potential is not realized, the securities purchased may not perform as expected, reducing the trust’s return. Growth style companies also may be more sensitive to changes in current or expected earnings than the prices of other stocks. In addition, different types of stocks tend to shift in and out of favor depending on market and economic conditions, growth stocks may perform differently from the market and other types of securities.


Value Style Risk Certain unit investment trust portfolios invest in value style stocks. Value stocks are issued by companies which, based upon their lower than average price/book ratios, are believed to be undervalued or inexpensive relative to other companies in the same industry or the economy as a whole. These common stocks were generally selected on the basis of an issuer’s business and economic fundamentals or the securities’ current and projected credit profiles, relative to current market price. Such companies are subject to the risk of incorrectly estimating certain fundamental factors and the risk that a stock judged to be undervalued may actually be appropriately priced. In addition, value stocks are subject to the risk that the valuations will not improve. Value stocks will generally underperform during periods when value style investments are out of favor.

Small & Mid-Cap Risk Certain unit investment trust portfolios invest in stock of small and mid-cap companies. Stocks of small and mid-cap companies are often more volatile than those of larger companies as a result of several factors such as limited trading volumes, products or financial resources, management inexperience and less publicly available information.

Concentration Risk Certain unit investment trust portfolios may be concentrated in certain market sectors/industries. A portfolio concentrated in a single market sector may present more risk than a portfolio broadly diversified over several sectors.

Country Risk Certain unit investment trust portfolios invest in securities issued by issuers operating in a single or a few countries. A portfolio concentrated in a single or a few countries may present more risk than a portfolio broadly diversified over several countries or geographic locations. They may be particularly susceptible to changes in the political, diplomatic and economic conditions of a specific country or geographic location.

Diversification Risk Certain unit investment trusts may hold a relatively small number of securities, which means investors’ may encounter greater market risk than a more diversified investment.

Foreign Securities Risk Certain unit investment trusts invest in foreign securities. Investing in foreign securities involves certain risks not typically associated with investing solely in the United States. This may magnify volatility due to changes in foreign exchange rates, the political and economic uncertainties in foreign countries, U.S. or foreign tax treatment, the potential lack of liquidity, and government supervision and regulation.

Emerging Markets Risk Certain unit investment trust portfolios invest in emerging markets. Investing in emerging markets entail special risks such as currency, political, economic and market risks. Countries with emerging markets may have relatively unstable governments, may present the risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets, and may have less protection of property rights than more developed countries. The economies of countries with emerging markets may be based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates. Local securities markets may also trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. It will likely be more costly and difficult for the sponsor to enforce the laws or regulations of a foreign country or trading facility. It is possible that the foreign country or trading facility may not have laws or regulations which adequately protect the rights and interests of investors.


Exchange-Traded Fund Risk Certain unit investment trust portfolios invest in shares of exchange-traded funds. Exchange-traded funds are subject to various risks, including management’s ability to meet the portfolio’s investment objective, manage the portfolio when the underlying securities are redeemed or sold, manage during periods of market turmoil and as investors’ perceptions regarding ETFs or their underlying investments change. ETFs may, in some circumstances, trade at a discount from their net asset value in the secondary market.

Investors will bear not only their share of the trust’s expenses, but also those of the underlying exchange-traded funds. By investing in other exchange-traded funds, the trust incurs greater expenses than investors would incur if they invested directly in the exchange-traded funds.

Closed-End Fund Risk Certain unit investment trust portfolios invest in shares of closed-end portfolios. Investors will bear not only their share of the trust’s expenses, but also those of the underlying funds. By investing in other funds, the trust incurs greater expenses than investors would incur if they invested directly in the funds. Shares of closed-end funds frequently trade at a discount to their net asset value in the secondary market and the net asset value of closed-end fund shares may decrease.

Certain closed-end funds may employ the use of leverage in their portfolios. While leverage often increases the yield of a closed-end fund, it also increases risk. This risk includes the likelihood of increased volatility and the possibility that the closed-end fund’s common share income will fall if the dividend rate on the preferred shares or the interest rate on any borrowings rises.

Fixed Income Risk Certain unit investment trust portfolios invest in fixed income securities. Fixed income securities are subject to various risks, including interest rate, credit, call, and quality risk. In general, the value of the fixed income securities will fall if interest rates rise. In a declining interest-rate environment, the portfolio may generate less income. Additionally, bonds in an underlying fund may be called by the issuer, which may decrease the overall income potential of the portfolio. A security issuer may be unable to make interest and/or principal payments in the future. Also, the longer the period to maturity, the greater the sensitivity to interest rate changes.

Below Investment Grade Risk Certain unit investment trust portfolios invest in high yield securities. High yield bonds are generally below investment grade quality (“junk” bonds). Investing in such bonds should be viewed as speculative and investors should review their ability to assume the risks associated with investments which utilize such bonds.

Junk bonds are subject to numerous risks including higher interest rates, economic recession and deterioration of the junk bond market, possible downgrades and defaults of interest and/or principal. Junk bond prices tend to fluctuate more than higher rated bonds and to a greater degree affected by short-term credit developments.

Other Important Considerations

Past performance is not indicative of future results.Unit investment trust units are not deposits on any bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Unit investment trusts are subject to fees and expenses. Please consider the charges and expenses of the unit investment trust(s) carefully before investing. The prospectus contains this and other information about the unit investment trust(s).


AppendixAdditional Resources & Unit Investment Trust StatisticsFor additional information, you can visit the following websites:

▪ Securities and Exchange Commission (www.SEC.gov)

▪ Financial Industry Regulatory Authority (www.FINRA.org)

▪ Securities Industry and Financial Markets Association (www.SIFMA.org)

▪ Investment Company Institute (www.ICI.org)

Total net assets Millions of dollars, year-end

Number of trusts Year-end

New deposits Millions of dollars, annual

YearTotal trusts Equity

Taxable debt

Tax-free debt

Total trusts Equity

Taxable debt

Tax-free debt

Total trusts Equity

Taxable debt

Tax-free debt

1990 $105,390 $4,192 $9,456 $91,742 12,131 171 722 11,238 $7,489 $495 $1,349 $5,644

1991 $102,828 $4,940 $9,721 $88,167 12,388 168 678 11,542 8,195 900 1,687 5,609

1992 $97,925 $6,484 $9,976 $81,465 13,598 230 745 12,623 8,909 1,771 2,385 4,752

1993 $87,574 $8,494 $8,567 $70,513 13,740 258 679 12,803 9,359 3,206 1,598 4,555

1994 $73,682 $9,285 $7,252 $57,144 13,310 306 568 12,436 8,915 3,265 1,709 3,941

1995 $73,125 $14,019 $8,094 $51,013 12,979 301 578 12,100 11,264 6,743 1,154 3,367

1996 $72,204 $22,922 $8,485 $40,796 11,764 378 591 10,795 21,662 18,316 800 2,546

1997 $84,761 $40,747 $6,480 $37,533 11,593 563 513 10,517 38,546 35,855 771 1,919

1998 $93,943 $56,413 $5,380 $32,151 10,966 872 414 9,680 47,675 45,947 562 1,166

1999 $91,970 $62,128 $4,283 $25,559 10,414 1,081 409 8,924 52,046 50,629 343 1,074

2000 $74,161 $48,060 $3,502 $22,599 10,072 1,554 369 8,149 43,649 42,570 196 883

2001 $49,249 $26,467 $3,784 $18,999 9,295 1,500 324 7,471 19,049 16,927 572 1,550

2002 $36,016 $14,651 $4,020 $17,345 8,303 1,247 366 6,690 11,600 9,131 862 1,607

2003 $35,826 $19,024 $3,311 $13,491 7,233 1,206 320 5,707 12,731 10,071 931 1,729

2004 $37,267 $23,201 $2,635 $11,432 6,499 1,166 295 5,038 17,125 14,559 981 1,585

2005 $40,894 $28,634 $2,280 $9,980 6,019 1,251 304 4,464 22,598 21,526 289 782

2006 $49,662 $38,809 $2,142 $8,711 5,907 1,566 319 4,022 29,057 28,185 294 578

2007 $53,040 $43,295 $2,066 $7,680 6,030 1,964 327 3,739 35,836 35,101 298 438

2008 $28,543 $20,080 $2,007 $6,456 5,984 2,175 343 3,466 23,590 22,335 557 698

2009 $38,336 $24,774 $3,668 $9,894 6,049 2,145 438 3,466 22,293 16,159 2,201 3,933

2010 $50,567 $34,112 $3,780 $12,675 5,971 2,212 491 3,268 30,936 25,003 928 5,006

2011 $59,931 $40,638 $3,602 $15,691 6,043 2,395 512 3,136 36,026 31,900 765 3,361

2012 $71,725 $51,905 $4,063 $15,757 5,787 2,426 553 2,808 43,404 40,012 1,236 2,157

2013 $86,504 $70,850 $3,560 $12,094 5,552 2,428 580 2,544 55,628 53,719 916 993

2014 $101,136 $85,957 $3,065 $12,114 5,381 2,503 591 2,287 65,530 63,991 624 915

2015 $94,127 $80,417 $2,597 $11,113 5,188 2,609 587 1,992 $65,949 $64,582 $492 $875

Note: Components may not add to the total because of rounding.

Source: Investment Company Institute. 2016. 2016 Investment Company Fact Book: A Review of Trends and Activities in the U.S. Investment Company Industry, P. 186. Washington, DC: Investment Company Institute. Available at www.icifactbook.org.


GlossaryAnnual Operating Expenses: These expenses include, but are not limited to, a trustee fee, sponsor supervisory fee, evaluator fee, bookkeeping and administrative fee, and other operating expenses that are paid from the trust assets.

Breakpoint: A breakpoint is a level of dollar investment in a unit investment trust at which an investor becomes eligible for a discounted sales fee. This level may be achieved through a single purchase or aggregated smaller purchases through the sponsor’s qualifying terms.

Closed-End Fund: A closed-end fund is a fund with a fixed number of shares outstanding which does not redeem shares back to the sponsor like a typical mutual fund does. Closed-end funds act more like stock. They issue a fixed number of shares to the public in an initial public offering. After the initial offering, shares in the fund are bought and sold on a stock exchange. The fund is not obligated to issue new shares or redeem outstanding shares. The price of a share in a closed-end fund is determined entirely by market demand, so shares can either trade below their net asset value (“at a discount”) or above (“at a premium”). This fund is also called a closed-end investment company or publicly-traded fund.

Bond (Fixed Income): A bond is a debt instrument issued for a period of over one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other institutions issue bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal. Investors become a creditor of the issuer. However, the buyer does not gain any kind of ownership rights to the issuer. A bond holder has a greater claim on an issuer’s income than a shareholder in the case of financial distress. Bonds are often divided into different categories based on tax status, credit quality, issuer type, maturity, secured/unsecured and several other bond classifications. The yield from a bond is composed of three components: coupon interest, capital gains and interest on interest (if a bond pays no coupon interest, the only yield will be capital gains). A bond might be sold at, above, or below par (the amount paid out at maturity), but the market price will approach par value as the bond nears maturity. A riskier bond generally provides a higher payout to compensate for additional risk. Some bonds are tax-exempt. These are typically issued by municipal, county or state governments, whose interest payments are exempt from federal income tax, and sometimes state or local income tax.

Creation & Development (C&D) Fee: This fee is designed to compensate the unit investment trust sponsor for the costs of creating and developing the unit investment trust.

Deposit Date (Initial Offer Date): This is the date a unit investment trust is formed and securities are deposited into the trust. Potentially the same day units of the unit investment trust are offered to the public during a primary offering period.

Distribution: A distribution is a payment of dividends or capital gains to the unit holders of record.

Exchange Traded Fund (ETF): This is usually a fund that tracks an index, but is traded on an exchange like a stock. ETFs typically bundle together the securities in an index. Since ETFs are traded on stock exchanges, they can be bought and sold at any time during the day. Their price can fluctuate from moment to moment, just like a stock’s price. An investor will need a broker in order to purchase ETFs. ETFs are more tax-efficient than open-end mutual funds as they have very low operating and transaction costs associated with them. There are no sales loads or investment minimums required to purchase an ETF.

Financial Industry Regulatory Authority, Inc. (FINRA): FINRA is a self-regulatory organization founded in 2007 from a merger between the NASD and NYSE Regulation, Inc. FINRA acquired the responsibilities previously handled by the NASD. The organization is responsible for the operation and regulation of the NASDAQ stock market and over-the-counter markets. FINRA investigates complaints against member firms and tries to ensure that all of its members adhere to regulations set forth by FINRA and the SEC. FINRA has the ability to expel members from an exchange in instances of wrongdoing, and reports to the SEC but cannot initiate legal action. The organization is run by a board that takes half of its representatives from the securities industry and half from the public.

Grantor: A grantor is a type of unit investment trust where unit holders represent pro-rata ownership (proportionate ownership) of the underlying securities in the trust.

In-Kind Distribution: An in-kind distribution is a distribution made to unit holders in the form of securities instead of cash.

Investment Company Act of 1940: This act enforces a set of federal laws which regulate the registration and activities of U.S. investment companies, enforced by the SEC.

Investment Grade: This is a bond rating assigned to debt instrument by Fitch Ratings, Moody’s Investors Service, or Standard & Poor’s. (See chart pg. 13).

Investment Objective: This is the result desired by a unit investment trust, such as current income or capital appreciation.


Liquidation/Redemption Price (LIQ): This price represents the value per unit that a unit holder would receive if the unit holder redeemed or sold units. This price is equal to the net asset value per unit including any remaining organization costs and creation & development fee. This price reflects any remaining non-contingent deferred sales charges payable in connection with the liquidation of units.

Mutual Fund: A mutual fund is an open-end fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives listed in the fund’s prospectus. Mutual funds raise money by selling shares of the fund to the public.

The money they receive from the sale of their shares (along with any money made from previous investments) is used to purchase various investment vehicles, such as stocks, bonds and money market instruments. In exchange for the money, shareholders receive an equity position in the fund and, in effect, in each of its underlying securities. For most mutual funds, shareholders are free to redeem their shares at any time. The price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund.

Net Asset Value (NAV): The NAV is the dollar value of a single unit of a unit investment trust. It is based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding. Net asset value is calculated at the end of each business day.

Non-Investment Grade: This is a bond rating set by Fitch Ratings, Moody’s Investors Service, or Standard & Poor’s that signifies lower credit quality with a higher risk of default. Another name for non-investment grade bonds is “junk bonds”. (See chart pg. 13).

Organizational Costs: These costs reimburse the unit investment trust Sponsor for some or all of the costs of creating the unit investment trust, including preparation of legal documents, registration fees, and initial fees and expenses of the trust.

Primary Market: The primary market is the market for newly issued securities. In the primary market the security is purchased directly from the issuer/sponsor. This differs from the secondary market where the security is purchased from other investors.

Public Offering Price (POP): The POP is the net asset value per unit plus any applicable organization costs and sales charges. This is the regular public offering price paid per unit to purchase units.

Regulated Investment Company (RIC): A RIC is an investment company that is eligible under IRS Regulation M to pass capital gains, dividends and earned interest directly to shareholders taxed at the investor level. RICs include open-end funds (mutual funds), closed-end funds, unit investment trusts and exchange traded funds.

Rollover: A rollover is a movement of funds from one unit investment trust to another unit investment trust, usually offered at a discount to the investor.

Secondary Date: This is the date which units can no longer be purchased from the sponsor in the primary market.

Securities and Exchange Commission (SEC): The SEC is the primary federal regulatory agency for the securities industry. The SEC is responsible for promoting full disclosure and to protect investors against fraudulent and manipulative practices in the securities industry. The SEC enforces, among other acts, the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940 and the Investment Advisers Act. The SEC is an independent, quasi-judiciary agency. The SEC consists of four divisions. The Division of Corporate Finance supervise all publicly traded companies are disclosing the required financial information to investors.

The Division of Market Regulation oversees all legislation involving brokers and brokerage firms. The Division of Investment Management regulates the mutual fund and investment advisor industries. The Division of Enforcement enforces the securities legislation and investigates possible violations.

Share: A share is a certificate representing one unit of ownership in a corporation, mutual fund, or limited partnership. A share is known as a unit when referring to a unit investment trust.

Sponsor (Issuer): A sponsor is the company offering (or having already offered) securities for sale to investors which include, but are not limited to corporations, investment trusts, and government entities.

Stock (Equity): A stock is a share of a company. Corporations raise capital by issuing stocks which entitle the stock owners (shareholders) to partial ownership of the corporation. Stocks are bought and sold on an exchange or over the counter. There are multiple types of stocks, but the two most common forms are preferred and common stock.


Information on investment products is for informational purposes only and does not constitute an investment recommendation or a solicitation to buy or sell the investment product(s) described herein. Specific investment terms are for illustration purposes only and may not reflect the actual terms of an investment product available for purchase from Nuveen. Nuveen does not warrant the accuracy or completeness of any information contained herein and provides no assurance that this information is, in fact, accurate. The information in this material is subject to change without notice. This material may not contain a complete discussion of investment terms or risks and you should only rely on the information contained in relevant prospectus prior to purchasing an investment product or making a recommendation to a customer. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Nuveen explicitly disclaims any responsibility for product suitability or suitability determinations related to individual investors. The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time.There is no assurance that a unit investment trust will achieve its investment objective. An investment in a unit investment trust is subject to market risk, which is the possibility that the market values of securities owned by the trust will decline and that the value of trust units may therefore be less than what you paid for them. Unit investment trusts are unmanaged. You can lose money investing in a unit investment trust. Unit investment trusts (UITs), open-end mutual funds, closed-end funds and exchange-traded funds (ETFs) are different types of investment vehicles with different expense structures and different inflows/outflows and distribution requirements.Please consider the investment objectives, risks, charges and expenses of the trust. The prospectus contains these factors and other information about the trust. To obtain a prospectus, please request one from your financial advisor or download one from sec.gov/edgar.shtml. Please read the prospectus carefully before investing.The trusts are distributed by Nuveen Securities, LLC, a subsidiary of Nuveen Investments, Inc.

Sales Charge: This is a fee charged by a sponsor, broker or agent for service in facilitating a transaction, such as the buying or selling of securities. Brokers can be split into two categories, discount brokers and full service brokers. Discount brokers charge relatively low sales charges, but provide no services beyond executing trades. Full service brokers charge higher sales charges, but provide research and investment advisory services.

Secondary Market: This follows the primary market and is the market in which an investor purchases a security from another investor rather than the issuer.

Tax-Free Bond: A tax-exempt (typically at the federal and/or state level) bond is offered by municipalities to pay for projects benefiting the municipality.

Taxable Bond: A taxable bond is a bond in which returns are taxable by the federal, state, and/or local government.

Termination Date: This is the date the unit investment trust is dissolved and proceeds from the units are paid to unit holders.

Trust Term: This is the duration of the unit investment trust.

Unit: This is a unit investment trust share that is a combination of multiple securities sold together as a single product.

Unit holder: This is the name of an individual or entity that is the registered holder of the issuer’s securities. Dividends and other distributions are paid only to unit holders of record. A unit holder is also referred to as shareholder of record, holder of record, or owner of record.

Unit Investment Trust: A unit investment trusts is an SEC-registered investment company which purchases a fixed, unmanaged portfolio of securities and then sells shares (also known as units) of the trust to investors. Capital gains, interest and dividend payments are passed on to shareholders at regular intervals. Some investors prefer unit investment trusts to actively managed investments due to unit investment trusts typically incur lower annual operating expenses. However, unit investment trusts often have sales charges and entrance/exit fees. A unit investment trust may be referred to as a fixed investment trust, participating trust, or unit investment trust, depending on the structure.

Unmanaged (Fixed) Portfolio: An unmanaged (fixed) portfolio is a static collection of investments owned by the same individual or organization. These investments often include stocks, bonds, and other securities. A unit investment trust is a common type of unmanaged portfolio.

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