Self Directed Investor Inc
SDI: "Empowering investors with ideas and education"
Symbol Lookup »  
Topics:ChinaETFsEarningsEconomyEnergyForexGoldIncomeLessonsIdeasTrading

  • Other news: News from PR Newswire
| More

Are UITs Better Than ETFs?

Mon, Nov 26, 9:15 AM ET, by Michael Johnston

The term “ETF” is used by many investors to refer to a wide range of financial structures that aren’t technically 1940 Act Exchange-Traded Funds. Many of the most popular ETFs included in our Free ETF Screener are technically Unit Investment Trusts (UITs), a type of security that functions in largely the same way as an ETF but features some structural nuances that impact the risk/return profile.

[Download How to Pick The Right ETF Every Time].

Dividends

One primary difference between a straight ETF and an exchange-traded-UIT—such as the S&P 500 SPDR (SPY, A)—is how dividends are handled.

When a UIT receives a dividend from a component company, the fund managers will hold it in cash until the end of the quarter. Come the end of the quarter, collected dividends are paid out to investors holding units of the fund. ETFs that are not set up as UITs—such as the iShares S&P 500 Index ETF (IVV, A)—have the option to reinvest dividends immediately. This can provide favorable returns to investors during bull markets, as the reinvested dividends capitalize on rising stock prices.

When the market drops, however, UITs have the upper hand. By having the cash received from dividends on the sidelines, UITs are reinvesting that cash into declining stocks, which could result in an erosion of capital [see our Monthly Dividend ETFdb Portfolio].

Tracking Error

UIT fund managers must replicate the underlying index at all times. For example, the S&P 500 SPDR must be invested in all 500 stocks that compose the S&P 500 index to ensure the UIT precisely mimics the price movements of the actual index. An ETF that is actively managed can invest in multiple products in an attempt to re-create the performance of the underlying index or asset. This type of management can result in tracking errors – at times the ETF may outperform or underperform the underlying asset.

The trading style of the trader or investor will determine which model—UIT or ETF—they should choose to trade. With a UIT there are likely to be no surprises outside of what happens to the index. ETFs that are more actively managed may have surprises not linked to market movements. An example of this occurs when the investments chosen to re-create the underlying asset don't accurately reflect the price changes in the underlying asset [see 5 Important ETF Lessons In Pictures].

Over a long time-frame, slight deviations in performance relative to the underlying asset may be dismissed as inconsequential to the average investor. Large deviations, on the other hand, make it hard to determine what you are actually buying. Therefore, before you purchase an ETF, note how the ETF has performed historically relative to the benchmark index or asset it is meant to represent. A little homework up front can avoid a surprise down the road.

Active traders and options traders generally gravitate toward UIT products—The S&P 500 SPDR, for example, has historically been the highest volume ETF/UIT product. These types of traders are looking for transparency and price action, which is linked to the index they have built their strategies on. If an ETF does not move lower (or moves too low) when the underlying index moves lower, it is very hard to develop an active or options trading strategy for such an instrument. UITs generally do not have this issue [See 101 ETF Lessons Every Financial Advisor Should Learn].

Share Lending

Share lending is a practice by which shares held within an ETF are lent out to other financial firms in exchange for an interest fee. UITs never lend out shares. The S&P 500 SPDR—a UIT—therefore, doesn't lend out any shares, but the iShares S&P 500 Index ETF does [see Cheapskate ETFdb Portfolio].

The percentage of share-lending profits paid into the fund is laid out in the investment prospectus; the iShares S&P 500 Index ETF re-invests 65%; the Vangard S&P 500 ETF (VOO, A+) re-invests 100% of share-lending profits back into the fund.

Fees and expenses erode profits over time, which means most ETFs and UITs will underperform their underlying index. Re-invested share-lending profits help diminish the gap in performance between the ETF and the index. In some years, it's possible for an ETF to more closely track an index than a UIT, simply because of the profits generated by share lending help offset fees.

SPY vs. IVV

SPY and IVV have performed very similarly from 2008 through the end of 2011 and the table below shows the performance of each fund over four years. Returns include income from dividends and interest payments (applicable to IVV) and capital gains or losses; management fees and expenses have also been deducted.

Ticker 2008 2009 2010 2011
SPY -36.81% +26.37% +15.06% +1.89%
IVV -36.93% +26.42% +15.09% +1.86%
S&P 500 Index -37.00% +26.46 +15.06% +2.11%

While there are slight differences in the performance from year-to-year between SPY, IVV and the underlying S&P 500, the risk profiles of the investments are quite similar.

The Bottom Line

Despite their differences, the S&P 500 SPDR—a UIT—and the iShares S&P 500 ETF, have performed similarly and share nearly the same risk profile. This may not always be the case. Each investment structure has advantages and disadvantages, which are often highlighted during varying market conditions. A UIT will be somewhat cushioned during market declines because dividends aren't reinvested. Unfortunately, UITs receive no income from share lending. Managed ETFs have the possibility of tracking errors, dividends are re-invested, and share-lending income can offset management fees and expenses. Thoroughly read the investment prospectus and view the past performance of the UIT/ETF relative to underlying index so you feel confident that you know what you are buying.

[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]

Disclosure: No positions at time of writing.

Click here to read the original article on ETFdb.com.


SDI Glossary: "price" Definition
SDI Glossary: "Dividend" Definition
SDI Glossary: "Exchange" Definition
SDI Glossary: "ETFs" Definition
SDI Glossary: "iShares" Definition
This Article's Word Cloud:   ETFdb   ETFs   Index   SPDR   This   UITs   asset   between   cash   dividends   during   example   expenses   fees   from   fund   have   historically   iShares   income   index   into   invested   investment   investors   lending   management   market   more   over   performance   performed   price   profits   quarter   relative   risk   share   shares   such   that   their   time   traders   underlying   very   what   which   will   year

| More

SCZ Crosses Below Key Moving Average Level
Thu, Jul 31, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the iShares MSCI EAFE Small-Cap ETF (SCZ) crossed below ...

EFV Makes Notable Cross Below Critical Moving Average
Thu, Jul 31, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the iShares MSCI EAFE Value ETF (EFV) crossed below ...

FXZ Crosses Critical Technical Indicator
Thu, Jul 31, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the First Trust Materials AlphaDEX Fund ETF (FXZ) entered ...

NORW Crowded With Sellers
Thu, Jul 31, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the MSCI Norway ETF (NORW) entered into oversold territory, ...

SPHQ Crosses Critical Technical Indicator
Thu, Jul 31, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the PowerShares S&P 500 High Quality Portfolio ETF (SPHQ) ...

EXI Crowded With Sellers
Thu, Jul 31, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the iShares Global Industrials ETF (EXI) entered into oversold ...

XLI Crowded With Sellers
Thu, Jul 31, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the Industrial Select Sector SPDR Fund ETF (XLI) entered ...

DWAS Crosses Critical Technical Indicator
Thu, Jul 31, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the PowerShares DWA SmallCap Momentum Portfolio ETF (DWAS) entered ...

Shares of FEP Now Oversold
Thu, Jul 31, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the First Trust Europe AlphaDEX Fund ETF (FEP) entered ...

iShares MSCI France Getting Very Oversold
Thu, Jul 31, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the iShares MSCI France ETF (EWQ) entered into oversold ...

SPDR S&P Dividend (SDY) Enters Oversold Territory
Thu, Jul 31, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the SPDR S&P Dividend ETF (SDY) entered into oversold ...

VIS Crowded With Sellers
Thu, Jul 31, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the Vanguard Industrials ETF (VIS) entered into oversold territory, ...

IYJ Crowded With Sellers
Thu, Jul 31, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the iShares U.S. Industrials ETF (IYJ) entered into oversold ...

VFC Takes Over #78 Spot From FMC Technologies
Thu, Jul 31, 12:14 PM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

International High Yield Bond (IHY) Enters Oversold Territory
Thu, Jul 31, 12:14 PM ET, by ETF Channel

In trading on Thursday, shares of the International High Yield Bond ETF (IHY) entered into ...

VDC Crowded With Sellers
Thu, Jul 31, 12:14 PM ET, by ETF Channel

In trading on Thursday, shares of the Vanguard Consumer Staples ETF (VDC) entered into oversold ...

Shares of CGW Now Oversold
Thu, Jul 31, 12:14 PM ET, by ETF Channel

In trading on Thursday, shares of the Guggenheim S&P Global Water Index ETF (CGW) entered ...

XES Crosses Critical Technical Indicator
Thu, Jul 31, 12:14 PM ET, by ETF Channel

In trading on Thursday, shares of the SPDR S&P Oil & Gas Equipment & Services ...

XLP Crosses Critical Technical Indicator
Thu, Jul 31, 12:14 PM ET, by ETF Channel

In trading on Thursday, shares of the Consumer Staples Select Sector SPDR Fund ETF (XLP) ...

IYK Crowded With Sellers
Thu, Jul 31, 12:14 PM ET, by ETF Channel

In trading on Thursday, shares of the iShares U.S. Consumer Goods ETF (IYK) entered into ...

SPDR S&P International Industrial Sector (IPN) Shares Cross Below 200 DMA
Thu, Jul 31, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the SPDR S&P International Industrial Sector ETF (IPN) crossed ...

IHY Crosses Below Key Moving Average Level
Thu, Jul 31, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the International High Yield Bond ETF (IHY) crossed below ...

PSCE Crosses Below Key Moving Average Level
Thu, Jul 31, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the PowerShares S&P SmallCap Energy Portfolio ETF (PSCE) crossed ...

iShares Core S&P Mid-Cap ETF Experiences Big Outflow
Thu, Jul 31, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IJH, HSIC, HBI, PII Exchange traded funds (ETFs) trade just ...

WisdomTree Total Dividend Fund -- Insider Buying Index Registering 10.2%
Thu, Jul 31, 10:14 AM ET, by ETF Channel

A look at the weighted underlying holdings of the WisdomTree Total Dividend Fund (DTD) shows ...

12.6% of XLI Holdings Seeing Recent Insider Buys
Thu, Jul 31, 10:14 AM ET, by ETF Channel

A look at the weighted underlying holdings of the Industrial Select Sector SPDR Fund (XLI) ...

HCP a Top Ranked SAFE Dividend Stock With 5.2% Yield (HCP)
Thu, Jul 31, 9:24 AM ET, by ETF Channel

HCP, Inc. (HCP) has been named to the Dividend Channel ''S.A.F.E. ...

Shares of BSJI Now Oversold
Wed, Jul 30, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Guggenheim BulletShares 2018 High Yield Corporate Bond ETF ...

PowerShares DB Energy Fund Breaks Below 200-Day Moving Average - Notable for DBE
Wed, Jul 30, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the PowerShares DB Energy Fund ETF (DBE) crossed below ...

KBWI Crosses Critical Technical Indicator
Wed, Jul 30, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the PowerShares KBW Insurance Portfolio ETF (KBWI) entered into ...

VEGI Crosses Below Key Moving Average Level
Wed, Jul 30, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares MSCI Global Agriculture Producers ETF (VEGI) crossed ...

EGShares FTSE Emerging All Cap ex Taiwan Low Volatility Dividend Breaks Below 200-Day Moving Average - Notable for HILO
Wed, Jul 30, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the EGShares FTSE Emerging All Cap ex Taiwan Low ...

SPDR S&P Insurance Getting Very Oversold
Wed, Jul 30, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the SPDR S&P Insurance ETF (KIE) entered into oversold ...

LyondellBasell Industries Achieves #53 Analyst Rank, Surpassing Allegion
Wed, Jul 30, 1:14 PM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

FXF Crosses Critical Technical Indicator
Wed, Jul 30, 11:24 AM ET, by ETF Channel

In trading on Wednesday, shares of the Swiss Franc Trust ETF (FXF) entered into oversold ...

Shares of EPOL Now Oversold
Wed, Jul 30, 11:24 AM ET, by ETF Channel

In trading on Wednesday, shares of the iShares MSCI Poland Capped ETF (EPOL) entered into ...

IEI Crosses Below Key Moving Average Level
Wed, Jul 30, 11:24 AM ET, by ETF Channel

In trading on Wednesday, shares of the iShares 3-7 Year Treasury Bond ETF (IEI) crossed ...

FSZ Crosses Below Key Moving Average Level
Wed, Jul 30, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the First Trust Switzerland AlphaDEX Fund ETF (FSZ) crossed ...

XSW Crosses Above Key Moving Average Level
Wed, Jul 30, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the SPDR S&PSoftware & Services ETF (XSW) crossed above ...

Why HCP is a Top Socially Responsible Dividend Stock (HCP)
Wed, Jul 30, 9:44 AM ET, by ETF Channel

HCP, Inc. (HCP) has been named a Top Socially Responsible Dividend Stock by Dividend Channel, ...

PowerShares KBW Property & Casualty Insurance Portfolio Breaks Below 200-Day Moving Average - Notable for KBWP
Tue, Jul 29, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the PowerShares KBW Property & Casualty Insurance Portfolio ETF ...

Shares of KBWP Now Oversold
Tue, Jul 29, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the PowerShares KBW Property & Casualty Insurance Portfolio ETF ...

McKesson Achieves #66 Analyst Rank, Surpassing Express Scripts Holding
Tue, Jul 29, 12:14 PM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

SOCL Makes Bullish Cross Above Critical Moving Average
Tue, Jul 29, 11:14 AM ET, by ETF Channel

In trading on Tuesday, shares of the Social Media Index ETF (SOCL) crossed above their ...

IBB, MYL, JAZZ, AMGN: ETF Inflow Alert
Tue, Jul 29, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: IBB, MYL, JAZZ, AMGN Exchange traded funds (ETFs) trade just ...

EWZ: Large Outflows Detected at ETF
Tue, Jul 29, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: EWZ Exchange traded funds (ETFs) trade just like stocks, but ...

UWM, FLWS, FUBC, XXII: Large Outflows Detected at ETF
Tue, Jul 29, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: UWM, FLWS, FUBC, XXII Exchange traded funds (ETFs) trade just ...

MMM a Top Socially Responsible Dividend Stock With 2.4% Yield (MMM)
Tue, Jul 29, 9:24 AM ET, by ETF Channel

3M Co (MMM) has been named a Top Socially Responsible Dividend Stock by Dividend Channel, ...

PZD Makes Notable Cross Below Critical Moving Average
Mon, Jul 28, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the PowerShares Cleantech Portfolio ETF (PZD) crossed below their ...

KOLD Crosses Above Key Moving Average Level
Mon, Jul 28, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the Proshares UltraShort Bloomberg Natural Gas ETF (KOLD) crossed ...

Related videos | all videos »
  More articles:  1 2 3 4 5 6 7 next »

ABOUT US »   ADVERTISE »   CONTACT US »   TERMS OF USE & PRIVACY POLICY »

Are UITs Better Than ETFs? | Self Directed Investor | Copyright © 2008 - 2014, All Rights Reserved

Any ideas and opinions presented in Self Directed Investor content are for informational and educational purposes only, and do not reflect the opinions of BNK Invest, Inc. or any of its affiliates, subsidiaries or partners. In no way should any content contained herein be interpreted to represent trading or investment advice. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All site visitors agree that under no circumstances will BNK Invest, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained. Read Full Disclaimer.

SDI is associated with: ValueForum.com -- a subscription-based online social networking forum of over 1000 individual investors. | MarketNewsVideo.com -- videos appearing on SDI are produced by Market News Video. | TickerTech.com -- stock quote content appearing on SDI is at least 20 minutes delayed and is powered by Ticker Technologies. | GoldStockStrategist.com -- Edited by Scott V. Nystrom, PhD, Gold Stock Strategist provides analysis on gold mining companies.