Expert: Paul Henneman - 12/10/2004

Question
Hello:

Would a unit investment trust (UIT) be a good choice to use for an individual retirement account (IRA)?

I thank you for your reply.

Answer
Thank you for your question! I have not worked directly with UIT's myself, but am familiar with the concept, and was able to brush up a bit on the topic for this question. Just please keep in mind that I do not have extensive experience with UIT's as I offer some suggestions.
  Yes, I think a UIT could be an appropriate choice for an individual retirement account. The most important thing is to look closely at the holdings in the UIT. Your profits (or loss) will still be entirely tied to the performance of the holdings. While UIT's used to be primarly composed of municipal bonds, since the 1990's equity holdings have become popular. Fees should be low, you could expect a sales charge of 1 to 2 percent.
  One downside is that the trust expires at some future date (I am assuming that the UIT you are considering has equities as its holdings). This greatly reduces your flexibility to get in and out of investments as markets change. This is ok if you are not active in managing your portfolio, but not very good if you do participate to maximize your returns.
  If you are ok with the time frame for the UIT to expire, and find all of the holdings in the UIT attractive, it is a fine medium for your IRA. But if you question the soundness of any of the holdings, don't make compromises and take a few bad with the good. The holdings should also be at least a bit diversified, so your fortunes are not concentrated in a specific industry or sector of the market.
   The "Barron's Dictionary of Finance and Investment Terms" has a good definition of UIT's if interested, this is where I brought myself up to speed for your question as I have not worked directly with UIT's in the past. I recommend this as a great resource to have on hand, available at most major bookstores and amazon.com
  I hope this helps! Please do not hesitate to follow up with me if I can be of any additional service.

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com
www.VEReports.com