Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsMedium
A client is looking to invest in a security that represents an undivided interest in a fixed portfolio of securities, typically bonds or other debt instruments. This portfolio is supervised, but not actively managed. Which of the following investment products BEST fits this description?
- AExchange Traded Fund (ETF)
- BMutual Fund
- CUnit Investment Trust (UIT)
- DClosed-End Fund
Show answer & explanationAnswer & explanation
Correct answer: C. Unit Investment Trust (UIT)
A Unit Investment Trust (UIT) is characterized by a fixed portfolio of securities, typically bonds, that are supervised but not actively managed. Shares are redeemable with the trust at net asset value.
Why the other options are wrong
- A. ETFs are actively traded on exchanges and their portfolios can be actively managed or passively track an index.
- B. Mutual funds have actively managed portfolios that change over time.
- D. Closed-end funds are actively managed and trade on exchanges, with their share price determined by supply and demand.
Unit Investment Trust (UIT)
A Unit Investment Trust (UIT) is an investment company that offers a fixed portfolio of securities, typically bonds, for a specified period.
- Fixed portfolio, not actively managed.
- Units are redeemable with the trust.
- Typically terminates on a specified date.
Memory trick: UITs are 'United' and 'Immutable' portfolios.