Passively Managed Products
Given the relatively disappointing results from the actively managed fund universe over the past decade and the investing public’s growing sensitivity to fee levels in a low-rate environment, is it any wonder that investment flows are being diverted more and more to lower cost, “passively managed” alternatives? This phenomenon is occurring across all asset classes and not just in muniland. Investors in search of attractive tax-exempt income currently have two passively managed options: unit investment trusts (or UITs) and exchange-traded funds (or ETFs).
Unit Investment Trusts (UITs)
The simplest pools of municipal securities that investors can buy into are the unit investment trusts (UITs) offered by most major mutual fund groups, most notably Nuveeen Investments and Van Kampen/Invesco. These fund sponsors create a unit investment trust by purchasing a bundle of securities that meet certain criteria into a trust, and then sell you a participation interest (or shares) of that trust. The bonds in the portfolio are not traded (unless there are credit events or other technical matters requiring adjustment) and stay in the trust for a specific period of time, after which the trust is liquidated. (Note: In recent months, the fund industry has introduced a relatively new variation on this theme, namely, UITs comprised entirely of tax-exempt closed-end funds, instead of individual securities.)
The advantages of a UIT structure include security selection and ...