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   Portfolio   SPDR   This   UITs   asset   between   cash   deviations   dividends   during   example   expenses   fees   from   fund   have   iShares   income   index   into   invested   investment   investments   investors   lending   management   market   more   performance   performed   price   profits   relative   risk   share   shares   such   that   their   time   traders   underlying   very   what   when   which   will

| More

OIH Makes Notable Cross Below Critical Moving Average
Fri, Sep 23, 3:54 PM ET, by ETF Channel

In trading on Friday, shares of the Oil Services ETF (OIH) crossed below their 200 ...

Comcast Takes Over #20 Spot From Raytheon
Fri, Sep 23, 11:54 AM ET, by ETF Channel

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

Vanguard Mid-Cap Growth ETF Experiences Big Outflow
Fri, Sep 23, 11:14 AM ET, by ETF Channel

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

XLI, HON, UNP, UTX: ETF Outflow Alert
Fri, Sep 23, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: XLI, HON, UNP, UTX Exchange traded funds (ETFs) trade just ...

SPDR S&P Global Natural Resources ETF Experiences Big Outflow
Fri, Sep 23, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: GNR, POT, ADM, WY Exchange traded funds (ETFs) trade just ...

VUG, AAPL, GOOG, HD: ETF Outflow Alert
Fri, Sep 23, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: VUG, AAPL, GOOG, HD Exchange traded funds (ETFs) trade just ...

IWD, JPM, PFE, MRK: ETF Inflow Alert
Fri, Sep 23, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: IWD, JPM, PFE, MRK Exchange traded funds (ETFs) trade just ...

EMB: ETF Inflow Alert
Fri, Sep 23, 10:54 AM ET, by ETF Channel

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

SHY: ETF Inflow Alert
Fri, Sep 23, 10:54 AM ET, by ETF Channel

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

IYR, SPG, AMT, PSA: Large Inflows Detected at ETF
Fri, Sep 23, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: IYR, SPG, AMT, PSA Exchange traded funds (ETFs) trade just ...

DIA, GS, UNH, BA: ETF Inflow Alert
Fri, Sep 23, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: DIA, GS, UNH, BA Exchange traded funds (ETFs) trade just ...

11.5% of EXI Holdings Seeing Recent Insider Buys
Fri, Sep 23, 10:24 AM ET, by ETF Channel

A look at the weighted underlying holdings of the iShares Global Industrials ETF (EXI) shows ...

KEYW Holding Reaches Analyst Target Price
Fri, Sep 23, 10:14 AM ET, by ETF Channel

In recent trading, shares of KEYW Holding Corp (KEYW) have crossed above the average analyst ...

CMC Crosses Above Average Analyst Target
Fri, Sep 23, 10:14 AM ET, by ETF Channel

In recent trading, shares of Commercial Metals Co. (CMC) have crossed above the average analyst ...

BEL Crosses Above Average Analyst Target
Fri, Sep 23, 10:14 AM ET, by ETF Channel

In recent trading, shares of Belmond Ltd (BEL) have crossed above the average analyst 12-month ...

EXPD Crosses Above Average Analyst Target
Fri, Sep 23, 10:14 AM ET, by ETF Channel

In recent trading, shares of Expeditors International of Washington, Inc. (EXPD) have crossed above the ...

Watts Water Technologies Reaches Analyst Target Price
Fri, Sep 23, 10:14 AM ET, by ETF Channel

In recent trading, shares of Watts Water Technologies Inc (WTS) have crossed above the average ...

Canadian National Railway Reaches Analyst Target Price
Fri, Sep 23, 10:14 AM ET, by ETF Channel

In recent trading, shares of Canadian National Railway Co. (CNI) have crossed above the average ...

Williams Partners Reaches Analyst Target Price
Fri, Sep 23, 10:14 AM ET, by ETF Channel

In recent trading, shares of Williams Partners LP (WPZ) have crossed above the average analyst ...

WCI Communities Reaches Analyst Target Price
Fri, Sep 23, 10:14 AM ET, by ETF Channel

In recent trading, shares of WCI Communities Inc (WCIC) have crossed above the average analyst ...

Orion Engineered Carbons Reaches Analyst Target Price
Fri, Sep 23, 10:14 AM ET, by ETF Channel

In recent trading, shares of Orion Engineered Carbons SA (OEC) have crossed above the average ...

The Math Shows FRAK Can Go To $20
Fri, Sep 23, 9:54 AM ET, by ETF Channel

Looking at the underlying holdings of the ETFs in our coverage universe at ETF Channel, ...

OMI Crosses Above Average Analyst Target
Fri, Sep 23, 9:54 AM ET, by ETF Channel

In recent trading, shares of Owens & Minor, Inc. (OMI) have crossed above the average ...

Northwestern Reaches Analyst Target Price
Fri, Sep 23, 9:54 AM ET, by ETF Channel

In recent trading, shares of Northwestern Corp. (NWE) have crossed above the average analyst 12-month ...

Clorox Reaches Analyst Target Price
Fri, Sep 23, 9:54 AM ET, by ETF Channel

In recent trading, shares of Clorox Co (CLX) have crossed above the average analyst 12-month ...

Global Partners Reaches Analyst Target Price
Fri, Sep 23, 9:54 AM ET, by ETF Channel

In recent trading, shares of Global Partners LP (GLP) have crossed above the average analyst ...

Chesapeake Lodging Trust Reaches Analyst Target Price
Fri, Sep 23, 9:54 AM ET, by ETF Channel

In recent trading, shares of Chesapeake Lodging Trust (CHSP) have crossed above the average analyst ...

HUBB Crosses Above Average Analyst Target
Fri, Sep 23, 9:54 AM ET, by ETF Channel

In recent trading, shares of Hubbell Inc. (HUBB) have crossed above the average analyst 12-month ...

Vanguard Dividend Appreciation ETF Experiences Big Outflow
Thu, Sep 22, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: VIG, CVS, LMT, ACN Exchange traded funds (ETFs) trade just ...

EFA, AER, MPEL, TARO: ETF Outflow Alert
Thu, Sep 22, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: EFA, AER, MPEL, TARO Exchange traded funds (ETFs) trade just ...

EDV: ETF Outflow Alert
Thu, Sep 22, 11:14 AM ET, by ETF Channel

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

Vanguard Small-Cap Growth ETF Experiences Big Outflow
Thu, Sep 22, 11:14 AM ET, by ETF Channel

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

EWM Crosses Above Key Moving Average Level
Thu, Sep 22, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the iShares MSCI Malaysia ETF (EWM) crossed above their ...

KBWY: Large Outflows Detected at ETF
Thu, Sep 22, 10:54 AM ET, by ETF Channel

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

BND: ETF Inflow Alert
Thu, Sep 22, 10:54 AM ET, by ETF Channel

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

IJH, DRE, INGR, RMD: Large Inflows Detected at ETF
Thu, Sep 22, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: IJH, DRE, INGR, RMD Exchange traded funds (ETFs) trade just ...

XLP, PG, KO, MO: ETF Inflow Alert
Thu, Sep 22, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: XLP, PG, KO, MO Exchange traded funds (ETFs) trade just ...

USMV, PAYX, GIS, ED: Large Inflows Detected at ETF
Thu, Sep 22, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: USMV, PAYX, GIS, ED Exchange traded funds (ETFs) trade just ...

Marsh & McLennan Companies a Top Socially Responsible Dividend Stock With 2.0% Yield (MMC)
Thu, Sep 22, 8:14 AM ET, by ETF Channel

Marsh & McLennan Companies Inc. (MMC) has been named a Top Socially Responsible Dividend Stock ...

PHB: Large Outflows Detected at ETF
Wed, Sep 21, 11:14 AM ET, by ETF Channel

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

IOO, PM, BMY, NKE: Large Outflows Detected at ETF
Wed, Sep 21, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IOO, PM, BMY, NKE Exchange traded funds (ETFs) trade just ...

ITB, DHI, LEN, PHM: ETF Outflow Alert
Wed, Sep 21, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: ITB, DHI, LEN, PHM Exchange traded funds (ETFs) trade just ...

BWX: ETF Inflow Alert
Wed, Sep 21, 10:54 AM ET, by ETF Channel

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

SPDR S&P Retail ETF Experiences Big Inflow
Wed, Sep 21, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: XRT, GRPN, FRAN, DKS Exchange traded funds (ETFs) trade just ...

FOSL Crosses Above Average Analyst Target
Wed, Sep 21, 9:44 AM ET, by ETF Channel

In recent trading, shares of Fossil Group Inc (FOSL) have crossed above the average analyst ...

Cintas Reaches Analyst Target Price
Wed, Sep 21, 9:44 AM ET, by ETF Channel

In recent trading, shares of Cintas Corporation (CTAS) have crossed above the average analyst 12-month ...

Xylem Reaches Analyst Target Price
Wed, Sep 21, 9:44 AM ET, by ETF Channel

In recent trading, shares of Xylem Inc. (XYL) have crossed above the average analyst 12-month ...

DTS Reaches Analyst Target Price
Wed, Sep 21, 9:44 AM ET, by ETF Channel

In recent trading, shares of DTS Inc (DTSI) have crossed above the average analyst 12-month ...

Tobira Therapeutics Reaches Analyst Target Price
Wed, Sep 21, 9:44 AM ET, by ETF Channel

In recent trading, shares of Tobira Therapeutics Inc (TBRA) have crossed above the average analyst ...

TRMB Crosses Above Average Analyst Target
Wed, Sep 21, 9:44 AM ET, by ETF Channel

In recent trading, shares of Trimble Navigation Ltd. (TRMB) have crossed above the average analyst ...

  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 - 2016, 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 serious 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.