What is a unit investment trust? An easy way to build diversification while earning steady income

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UITs can offer you access to a wide range of asset classes and investment strategies through a single purchase.

  • A unit investment trust (UIT) is a type of investment fund that offers a fixed portfolio of stocks, bonds, and other assets for a set period of time.
  • UIT portfolios are typically fixed and not actively managed or traded.
  • UITs are particularly popular as diversification tools for hands-off investors and the retirement community, where stability is prized.
  • Visit Insider’s Investing Reference library for more stories.

If you’ve avoided mutual funds because of high management fees or how frequently they can be traded, you might benefit from a closer look at the unit investment trust, or UIT.

Like mutual funds, UITs pool investor funds to purchase a series of assets, which are then bundled and offered up as a single unit – making them great for portfolio diversification.

Unlike mutual funds, UITs are designed to be bought and held until a specific maturity date, with extremely limited trading in the meantime. Because of this, the funds tend to be particularly popular with buy-and-hold investors where stability is more highly valued.

As of December 2020, the Investment Company Institute (ICI) reported that there were 4,310 outstanding UITs, representing $77.85 billion invested, so a booming industry awaits the interested investor.

What is a UIT?

A UIT is one of three basic types of investment companies. The other two types of investment companies are open-end funds and closed-end funds, which we’ll cover later.

UITs offer investors a fixed portfolio that can include stocks, bonds, or other securities in the form of redeemable units. They’re public investments that are bought and sold directly through the company issuing them, or through a broker working as an intermediary. Investors can redeem UITs after a set period of time passed, known as the maturity date.

How does a UIT work?

The goal of a UIT is that the passively held assets it contains will provide capital appreciation or dividend income throughout the life of the trust. And while that outcome isn’t guaranteed, UITs are regulated through the Securities and Exchange Commission (SEC), so concerned investors can breathe easier. Every UIT must register through the commission, which then enforces requirements about everything from where the fund can invest to under what circumstances trades can be made.

The average UIT is typically made up of mostly stocks and bonds, but can also contain assets like mortgages, real estate investment trusts (REITs), master limited partnerships (MLPs), hybrid instruments like preferred shares, and beyond. These assets are often fixed around a broad theme, like American stocks offering historically high dividends, or corporate bonds from companies in a specific sector.

Money managers select assets for inclusion at the creation of the trust, aiming for securities they think will offer the most capital appreciation over time. They also set the maturity date for the fund, which can be anywhere between 15 months and 30 years. After that, the fund remains largely undisturbed until its maturity date.

A prosperous UIT will earn its investors income in two different ways: in the form of quarterly or monthly dividends throughout the life of a fund, and as capital appreciation when the fund matures. Once your UIT expires, you have the option of taking delivery of the underlying assets into your own brokerage account, reupping into a similar or identical trust, or liquidating your holdings, which would give you the current cash value.

UITs vs. mutual funds

Mutual funds and UITs are similar in that they’re pooled funds overseen by a professional money manager, and are subject to SEC regulation. Here’s how the two assets diverge:

  • Mutual funds are actively managed and UITs are not: The ability to buy and sell assets within a mutual fund increases the potential for capital gains – and, of course, losses. Since UITs don’t actively trade, fees are lower, and as fixed income investments, their underlying securities do not change except in rare cases like bankruptcy or merger.
  • Mutual funds and UITs structure dividends differently: While mutual funds are designed to reinvest your dividends, UIT investors can miss out during market upswings, as the latter doesn’t allow for the purchase of additional shares.
  • UITs have a maturity date, while mutual funds do not: Much like bonds or CDs, UITs have defined lifespans and set metrics to hit before their expiration. This makes UITs, by their nature, a more long-term investment than mutual funds.
  • Mutual funds and UITs offer different ways to invest: If you have the cash to invest in a mutual fund, you can purchase shares on demand, as their quantity is limitless. But since UITs have a set limit or shares released upon its initial public offering (IPO), you have to invest within that window or be subject to the whims of the secondary market.

Each investment type has its own limits. But by and large, the reason you’d see a portfolio organized as a UIT instead of a mutual fund is to minimize both short-term and long-term expenses.

UITs come with much lower expense ratios and also come with favorable tax terms. Because of the way capital gains taxes are structured, it’s possible to lose money on a mutual fund and pay taxes on gains you never actually appreciated. For example, if the shares were sold right before you got your hands on them, you could find yourself with a shared tax liability for someone else’s capital gains.

But that won’t happen with a UIT. Because the securities are bundled when you place the order and not before, the original value – or cost basis, as it’s termed – is specific to you and can’t burn you down the road.

Who should buy UITs?

UITs have benefits to offer every investor, but they’re particularly compelling for those who aren’t interested in building a portfolio security by security, or who don’t want to pay the high expense ratios on actively managed mutual funds. Plus, the lower buy-ins on UITs make them more accessible for newer investors or those with less capital.

UITs are also quite popular with those at or close to retirement age because they tend to be more stable investment vehicles. While UITs might not have the growth potential of a different asset class, their buy-and-hold strategy is lighter on risk as well. From the very start, you’ll know exactly where you’re invested, how long that investment will last, and roughly how much income you can expect from your investment, all without having to wait to pore over a prospectus.

If you’re looking to join the ranks of UIT investors, these funds can be purchased directly from the issuer, or bought and sold on the stock exchange. Talk to your financial adviser about which UIT might be a match for you and your situation.

The financial takeaway

As an investment, UITs are a different option from mutual funds or closed-end funds that offer a winning combination of low costs, reliability, tax protection, and fairly predictable gains.

There are certain pitfalls, of course, like a lack of flexibility and a potential cap on earnings, since dividends can’t be reinvested. But if you’re nearing retirement or simply trying to stretch a dollar, UITs can prove to be a plum choice for the (semi) conservative investor looking to diversify their portfolio.

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What is a municipal bond? How to earn tax-free income by investing in projects that impact your community

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State and local governments issue municipal bonds to help pay for a wide range of projects including roads, schools and hospitals.

  • Municipal bonds are debt securities issued by local governments to fund public projects like schools, hospitals, or highways.
  • Investors buy municipal bonds because interest earned is exempt from federal income taxes, and in some cases, from state and local taxes.
  • Because they are tax-efficient investment, municipal bonds are best for taxable accounts as opposed to tax-advantaged retirement accounts.
  • Visit Insider’s Investing Reference library for more stories.

Imagine a relatively safe, long-term investment that generates income, allows you to save on taxes, and funds public projects crucial a community.

That’s essentially what happens when you invest in municipal bonds, which allow you to invest in the infrastructure of state and local communities while adding diversity and tax efficiency to your portfolio.

Here’s what you need to know about municipal bonds, from why they’re popular among tax-smart investors to how they can benefit your portfolio.

What are municipal bonds?

A municipal bond, or “muni” for short, is a type of bond issued by a state or municipality to help fund necessary public works projects.

Munis are popular with investors because of their tax advantages. Interest earned on municipal bonds is usually exempt from federal income tax. If you purchase a muni in the state you live, it could also be exempt from state and local taxes. Earning tax-free income is especially attractive to investors in higher tax brackets.

Investors also like the inherent safety of municipal bonds. In most cases, because you are investing in a bond used to help finance infrastructure backed by a local government, you can usually count on getting your principal back at maturity.

How do municipal bonds work?

At its most basic level, a bond is a loan made by an investor to a borrower. Whereas treasury bonds are issued by the US government and corporate bonds are issued by companies, municipal bonds are issued by local and state governments.

State and local governments issue municipal bonds to help pay for a wide range of projects including roads, schools and hospitals. Investors who purchase these bonds lend money to the municipality in return for regular interest payments (usually semiannual) for a set amount of time.

Principal is repaid when the bond matures, or when the loan ends. Munis have a wide maturity range of one to 30 years.

It’s important to pay special attention to the type of account you use to purchase these bonds. In a traditional IRA or 401(k) retirement account, earnings already grow tax-free. Most investors find holding munis in taxable brokerage accounts help make the most of munis’ tax-free status.

In rare cases, municipal bond interest may not be exempt from federal taxes if they are used to fund an activity not qualified for tax-exempt status under IRS rules, like paying pension fund liability. It is usually obvious to you, your broker or your advisor when a muni is not exempt from federal taxes.

Investors who buy and sell municipal bonds may be liable for capital gains tax on profits from those sales or for bonds purchased at a discount price. In addition, if you are subject to the alternative minimum tax, you may be required to pay some taxes on municipal bond interest.

Are municipal bonds safe investments?

Municipal bonds are considered relatively safe investments because they have lower default rates and higher credit ratings than corporate bonds. Plus, many munis are backed by insurance that guarantees payment in the event of a default.

That’s not to say munis are immune from default. For example, during the Puerto Rican debt crisis and the Detroit city bankruptcy, there were several muni bonds that could no longer make payments.

If municipal bonds pique your interest, it’s important to understand credit ratings. There are three major credit ratings agencies – Standard & Poor’s (S&P), Moody’s and Fitch – all of which rate the issuers of municipal bonds based on their ability to meet their financial obligations. This makes it easier for investors to evaluate risk.

Although many munis receive the highest ratings from the agencies, such as AA+ or Aa1, it’s important to remember that ratings can be downgraded during the life of the bond if a municipality’s financial situation changes.

Like all bonds, munis also carry interest rate risk. When interest rates fall, prices for existing bonds paying higher rates will rise. In turn, when interest rates rise, prices on existing bonds paying lower rates will decline. If you hold muni bonds to maturity, price risk is not a factor. You only experience the ups and downs if you are buying and selling muni bonds.

How much will I earn from municipal bonds?

In return for safety and the tax advantages, investment-grade municipal bonds often yield less than their taxable counterparts, such as corporate and government-issued bonds.

High-yield munis, or munis that come from less-creditworthy issuers, can have significantly higher yields than investment-grade munis ,but they come with more investment risk. Investors in high-tax brackets may find that the tax advantages of investing munis help bridge the gap between muni and taxable bond rates.

How to buy municipal bonds

In most cases, you buy and sell municipal bonds through a broker. There are three main ways you can invest in munis:

  • Individual bonds bought through a broker require you to do your own research and decide whether to buy new issues or bonds sold through the secondary market, where you can buy munis already issued to other investors. You’ll also need to investigate credit risk carefully, since your own portfolio of muni bonds will likely not be as diversified as a mutual fund or ETF.
  • Municipal bond mutual funds invest in a wide-range of muni bonds, offering investors the diversity they can’t get on their own, while still providing the federal tax advantages on income and in some cases some limited state and local tax breaks. If the upside is instant diversification and professional management, the downside is recurring management fees. You’ll also be subject to capital gains tax when you sell your shares.
  • Mutual bond ETFs are a good way to invest in a diverse array of municipal bonds. Like mutual funds, income is exempt from federal taxes and some interest earned may also be tax exempt at the state and local level, depending on where you live.

    ETFs trade like stocks on the market with prices fluctuating throughout the day, so you may experience more volatility with an ETF than a mutual fund. Like mutual funds, you’ll be subject to capital gains tax when you sell your shares.

Whatever investment you choose, be sure to pay attention to the account you are using to purchase muni bonds. You likely don’t want them as part of your tax-deferred retirement accounts such as traditional IRAs or 401(k)s where you won’t get the full force of the tax exemptions. Better to put them in a taxable brokerage account.

The financial takeaway

Municipal bonds can offer a relatively safe, tax-advantaged way to diversify your fixed-income portfolio. While yields may not be as high as taxable bonds, the tax exemptions on interest earned can help even the playing field. Investors in high-tax brackets looking to diversify their taxable investment accounts may be best suited to municipal bond investing.

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Beginner’s guide to investing in marijuana stocks and the booming cannabis industry

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As cannabis goes mainstream, the budding industry is poised to grow.

  • As the legal cannabis market grows in the US, there are several ways for investors to gain exposure to the marijuana industry.
  • In addition to investing in individual stocks, marijuana ETFs allow you to invest in a range of companies across the industry. 
  • Due to legal uncertainties on the federal level, marijuana investments remain risky and volatile.
  • Visit Insider’s Investing Reference library for more stories.

When it comes to investing in the legal marijuana industry,  they dont call it the “green rush” for nothing. 

Many analysts are projecting massive growth for the cannabis industry. New Frontier, a Washington DC-based cannabis research firm, expects total US legal cannabis sales to exceed $35 billion by 2025.  

In light of such tremendous growth potential, many see marijuana as a golden investment opportunity – but not without risk. It’s important to remember that the use and sale of marijuana, despite state laws, is still illegal under federal law.

Here’s what you need to know about investing in the legal cannabis industry, including the risks and challenges, the biggest companies to watch, and why ETFs could be the safest way to add marijuana stocks to your portfolio. 

Basics of the cannabis industry

With each election, more states are voting to legalize some form of marijuana use. A total of 36 states have legalized medical marijuana, with 15 states and Washington DC legalizing cannabis for recreational adult use. 

Broadly speaking, there are two markets in the marijuana industry: recreational and medical. While each cater to different markets, both represent growth potential. Whereas medical marijuana stocks involve companies dedicated to the medicinal and therapeutic benefits of the drug, recreational cannabis companies cover products for personal enjoyment. 

On the medical side, there’s also a growing market for CBD products. CBD, short for cannabidiol, is the legal, non-psychoactive compound found in cannabis plants that’s taken to ease chronic pain, anxiety, and other ailments. 

The growing acceptance of cannabis is not just happening in the US, but all over the world. Grandview Research projects that the global market size for the cannabis industry will reach $73.6 billion by 2027.

“Investors have the opportunity to get in on the ground floor of an emerging industry,” says Michael Shea, CFP at Applied Capital, adding that by getting in early, investors could “capture outsized returns as the industry grows and develops.”

Types of marijuana investments 

Currently, the medical marijuana market offers strong short-term income potential. But the recreational side continues to attract investors as more states pass legislation. 

There are four major categories of marijuana stocks related to different facets of the cannabis industry:

  • Growers: Companies that own marijuana farms and actively cultivate the plant.
  • Retailers: This includes dispensaries in states where residents can purchase marijuana and cannabis-related products such as edibles, oils, and more. 
  • Manufacturers: Companies that provide ancillary support to the industry and are involved in cannabis extraction, product preparation, packaging, and labeling.
  • Drugmakers: Pharmaceutical companies that use biotech to create drugs derived from the cannabis plant.

It should be noted that some companies that are tangentially connected to the marijuana industry may still benefit from its growth. An example would be companies that develop hydroponic technologies, such as GrowGeneration (GRWG).

Risks of investing in marijuana 

One of the biggest risks of marijuana investing is that it’s rising popularity makes it a prime target for scam artists. In fact, the SEC has issued a warning that lists several various marijuana-related fraudulent investment schemes including unlicensed sellers, unsolicited investment offers, and market manipulation. 

Other risks of investing in marijuana to consider:

  • Business risk: As long as marijuana is federally illegal, it will continue to be difficult for marijuana companies to open US bank accounts. Sean van der Wal, Managing Partner at Drawing Capital, explains that this not only makes it more difficult to secure funding, but also means that “many marijuana producers rely on cash,” which “poses a significant risk from a liability and accounting perspective.”
  • Legislative risk: The industry’s growth is tied to legislation. Surprisingly, there’s even some risk involved with the legalization of marijuana. Kenny Polcari, founder and Managing Partner of Kace Capital Advisors, says future taxation is a big question mark. “Right now you can buy marijuana and pay no sales tax.” But “taxes will increase the price of marijuana for the end user.” And, if too high, those added costs could push some consumers away.
  • Valuation risk: Many of the companies that are involved in producing or selling marijuana are young. What should their valuations be?  It’s hard to tell. Polcari warns that “if valuations end up too high as the excitement builds, the potential exists that the market will correct and prices will decline.”
  • Demand risk: As more companies enter the market, supply could outpace demand for cannabis products. Van der Wal also says that “enthusiasts may be compelled to produce their own product in small batches for personal consumption” as legalization spreads. This could especially be true if high excise taxes are applied to marijuana sales. And, in these ways, he says “analysts may overstate the total addressable market.”
  • Volatility risk: Marijuana stock prices often swing wildly up and down in short periods of time. This is less likely to be a concern if you plan to hold onto your investments for 10-30 years or more. But if you have a shorter investment horizon, you may want to stay away from volatile investments like marijuana stocks.

How to invest in marijuana

Much like investing in any stock, you’ll need a broker to invest in marijuana. You’ll also want to do your due diligence before choosing investments, which means taking the time to research each company and staying up to date with the latest regulations. 

There are two main types of marijuana investments: individual stocks and marijuana ETFs. ETFs allow you to spread your investment among companies across the entire marijuana industry.  

If you’re a trader looking to take advantage of short-term price shifts, Polcari says that individual stocks may be the way to go. Otherwise, he prefers ETFs since they don’t require you to pick and choose and run the risk of picking the wrong company.

Marijuana ETFs

Some ETFs seek to provide investment results that correspond to an underlying index while others are actively managed. The advantage of index ETFs is that they tend to have lower expense ratios. But actively managed funds may be able respond faster to marijuana stock news – both positive and negative.

The list below of popular marijuana ETFs includes a mixture of actively managed and index options:

ETF Net Assets
ETFMG Alternative Harvest ETF (MJ) $1.44 billion
AdvisorShares Pure US Cannabis ETF (MSOS) $582.68 million
AdvisorShares Pure Cannabis ETF (YOLO) $265.07 million
The Cannabis ETF (THCX) $91.59 million
Global X Cannabis ETF (POTX) $84.36 million

Marijuana stocks

Because US marijuana companies are engaged in activities that are illegal on the federal level, there aren’t many publicly-listed US cannabis stocks on major exchanges. By contrast, Canadian cannabis companies – where recreational use of cannabis was legalized in 2018 – are able to list on major stock US exchanges like the Nasdaq and the New York Stock Exchange. 

The distinction is important to know because US cannabis companies looking to raise capital are forced to list on the secondary market, or trade over-the-counter (OTC). OTC stocks can be dangerous as they lack public financial records and are often more susceptible to price manipulation. 

The good news is that the number of publicly-listed marijuana stocks is growing. As you’re evaluating your options, the first thing to consider is the company’s market cap. The larger the market cap, the better the chance that the company will have the financial stability to survive over the long haul. 

Here’s a list marijuana stocks that have a market cap of at least $1 billion:

Company Market Cap Type
Canopy Growth Corp (CGC) $15.86 billion Grower/Retailer/Drugmaker
Curaleaf (CURLF) $7.74 billion Retailer/Drugmaker
GW Pharmaceuticals (GWPH) $6.77 billion Drugmaker
Green Thumb Industries Inc (GTBIF) $6.55 billion Manufacturer/Retailer
Tilray Inc (TLRY) $5.49 billion Drugmaker
Cronos Group (CRON) $4.70 billion Manufacturer
Village Farms International, Inc. (VFF) $1.41 billion Grower

The financial takeaway

Marijuana investing isn’t for everyone, especially for retail investors who prefer to minimize risk. But investors with a higher risk tolerance may find that the growth promise of marijuana stocks and ETFs make them a worthy addition to their portfolios.

From ETFs to over-the-counter stocks, here’s how to invest in the booming cannabis industry, according to 2 expert investorsHow to invest in healthcare, a massive market sector that offers unparalleled diversification for portfoliosAll the states where marijuana is legal – and 5 more that voted to legalize it in NovemberVolatility measures how dramatically stock prices change, and it can influence when, where, and how you invest

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