Unit Investment Trust ("UIT") Investment Risks
There is no assurance that a unit investment trust will achieve its investment objective.
Unit investment trusts are unmanaged. You can lose money investing in unit investment trusts. When sold, units may be worth more or less than the original amount invested. Product(s) discussed herein are not FDIC insured, may lose value, and are not bank guaranteed. You should not purchase an investment product or make an investment recommendation until you have read the specific offering documentation or prospectus and understand the specific investment terms, features, risks, fees, charges and expenses of such investment. A prospectus can be obtained at the issuer websites.
Risk Considerations
The following list includes common risks or characteristics associated with unit investment trusts. It should not be considered a complete list of all possible risks associated with unit investment trusts currently available in the marketplace.
Unit Investment Trust Structure Risks
Complex Investment Strategy Risk
Certain unit investment trusts utilize complex and specialized investment strategies. These trusts may invest widely across asset classes. They commonly invest in alternative investments such as commodities, foreign currencies, and derivatives/options or narrowly focused portfolios of non-traditional equity baskets. Investors should have a complete understanding of the underlying products from which a unit investment trust derives its value. Complex investment strategies are subject to a number of risks including increased volatility and greater potential for loss and are not suitable for all investors. Investors should refer to the prospectus for specific risks to complex investment strategies.
COVID-19 Economic Impact Risk
The COVID-19 global pandemic has caused and may continue to cause significant volatility and declines in global financial markets. While the U.S. has resumed "reasonably" normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease.
Custody Risk
Certain funds held by the trust rely on custodians for the safekeeping of commodities. Failure by a custodian to safekeep the commodities could result in a loss to a fund. In addition, a custodian may not carry adequate insurance to cover claims against it which could adversely affect the value of a fund's assets, and in turn the value of the trust.
Cybersecurity Risk
Unit investment trusts may be susceptible to potential operational risks through breaches in cybersecurity.
Early Termination Risk
The issuer and/or trustee may have the power to terminate the unit investment trust early in limited cases (see the prospectus for such cases). If the unit investment trust terminates early, the trust may suffer losses and/or be unable to achieve its investment objective. This could result in a reduction in the value of the units and result in a significant loss to unit holders.
Dilution Risk
As the sponsor sells units, the size of a trust will increase. The sponsor will seek to replicate the existing portfolio. When a trust buys securities, it will pay brokerage or other acquisition fees. Existing unit holders could experience a dilution of their investment (because of these fees and fluctuations in security prices between the time the sponsor creates units and the time a trust buys the securities). The sponsor cannot guarantee that the trust will keep its present size and composition for any length of time.
Inflation Risk
An investment in a unit investment trust is subject to inflation risk, which is the possibility the value of assets or income from investments, will be less in the future as inflation decreases the value of money. If inflation (the cost of goods or services) outpaces the investment growth, the real value of the units may not have the same purchasing power than at the time of investing, therefore the value of the units of a trust may decline as a result of inflation.
Investment Strategy Risk
A unit investment trust is exposed to additional risk due to its policy of investing in accordance with an investment strategy. Although the trustʼs investment strategy is designed to achieve the investment objective, there is no assurance that a unit investment trust will achieve its investment objective. The trust also may not perform as expected.
Leverage Risk
The use of leverage may cause higher volatility and increase the potential for loss and there is no assurance that a fundʼs leveraging strategy will be successful.
Liquidity Risk
A unit holder may be subject to liquidity risk if the sponsor does not maintain a secondary market for a trust; however, a unit holder who does not dispose of units in the secondary market may cause units to be redeemed by the trustee.
Market Disruption Risk
In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain investments as well as performance.
Market Risk
An investment in a unit investment trust is subject to market risk, which is the possibility that the market values of securities owned by the trust will decline and that the value of trust units may therefore be less than what an investor paid for them. Market value fluctuates in response to various factors including stock market movements, purchases or sales of securities by the trust, government policies, litigation, changes in interest rates, inflation, and the financial condition or perception of the securitiesʼ issuer. Accordingly, investors can lose money investing in a trust.
Non-Active Management Risk
The sponsor does not actively manage the portfolio of a unit investment trust. Securities are only bought and sold in limited circumstances. A trust will generally hold, and may continue to buy, the same securities even though a securityʼs outlook, rating, market value or yield may have changed. The value of your investment may fall over time.
Operational Risk
As the use of Internet technology has become more prevalent in the course of business, the trust has become more susceptible to potential operational risks through breaches in cybersecurity.
Term Risk
Short term strategy trusts should be considered as part of a long-term investment strategy and investors should consider, in light of their particular financial situations, whether it may be appropriate to invest in successive trust portfolios, if available, subject to the applicable sales charges. There may be tax consequences associated with an investment from one series to the next unless units are purchased in an IRA or other qualified tax-deferred account. Investors should consult their tax advisor or attorney to determine tax consequences associated with an investment from one portfolio to the next.
Volatility Risk
The value of the securities held by the trust may be subject to steep declines or increased volatility due to changes in performance or perception of the issuers.
Additionally, UITs are subject to the risks of their underlying portfolio holdings and investors should refer to the prospectus for a complete list of risks pertaining to a specific trust or strategy. Sush risks may include, but are not limited to, the following:
Common Stock
Certain unit investment trust portfolios invest in common stocks. Market value of stocks fluctuates in response to various factors including stock market movements.
Small & Mid-Cap Risk
Certain unit investment trust portfolios invest in stock of small and mid-cap companies. Stocks of small and mid-cap companies are often more volatile than those of larger companies as a result of several factors such as limited trading volumes, products or financial resources, management inexperience and less publicly available information.
Large-Cap Risk
Certain unit investment trust portfolios invest in securities of large-cap companies. These securities may underperform other investments that invest in small and mid-cap companies.
Dividend Payment Risk
Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer's board of directors and the amount of any dividend may vary over time. An issuer of a security may be unable or unwilling to make dividend payments, which may decrease the value of the units of the trust.
Growth Style Risk
Certain unit investment trust portfolios invest in growth style stocks. Growth stocks are issued by companies which, based upon their higher-than average price/book ratios, are expected to experience greater earnings growth rates relative to other companies in the same industry or the economy as a whole. Securities of growth companies may be more volatile than other stocks. If the perception of a companyʼs growth potential is not realized, the securities purchased may not perform as expected, reducing the trustʼs return. Growth style companies also may be more sensitive to changes in current or expected earnings than the prices of other stocks. In addition, different types of stocks tend to shift in and out of favor depending on market and economic conditions, growth stocks may perform differently from the market or other types of securities.
Value Style Risk
Certain unit investment trust portfolios invest in value style stocks. Value stocks are issued by companies which, based upon their lower-than average price/book ratios, are believed to be undervalued or inexpensive relative to other companies in the same industry or the economy as a whole. These common stocks were generally selected on the basis of an issuerʼs business and economic fundamentals or the securitiesʼ current and projected credit profiles, relative to current market price. Such companies are subject to the risk of incorrectly estimating certain fundamental factors and the risk that a stock judged to be undervalued may actually be appropriately priced. In addition, value stocks are subject to the risk that the valuations will not improve. Value stocks will generally underperform during periods when value style investments are out of favor.
Concentration Risk
Certain unit investment trust portfolios may be concentrated in certain market sectors/industries. A portfolio concentrated in a single market sector may present more risk than a portfolio broadly diversified over several sectors. Please read the prospectus for specific sector and/or industry concentration risk of any particular unit investment trust.
Diversification Risk
Certain unit investment trusts may hold a relatively small number of securities, which means investorsʼ may encounter greater volatility & market risk than a more diversified investment.
Country Risk
Certain unit investment trust portfolios invest in securities issued by issuers operating in a single or a few countries. A portfolio concentrated in a single or a few countries may present more risk than a portfolio broadly diversified over several countries or geographic locations. They may be particularly susceptible to changes in the political, diplomatic and economic conditions of a specific country or geographic location.
Foreign Securities Risk
Certain unit investment trusts invest in foreign securities. Investing in foreign securities involves certain risks not typically associated with investing solely in the United States. This may magnify volatility due to changes in foreign exchange rates, the political and economic uncertainties in foreign countries, U.S. or foreign tax treatment, the potential lack of liquidity, and government supervision and regulation.
Emerging Markets Risk
Certain unit investment trust portfolios invest in emerging markets. Investing in emerging markets entail special risks such as currency, political, economic and market risks. Countries with emerging markets may have relatively unstable governments, may present the risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets, and may have less protection of property rights than more developed countries. The economies of countries with emerging markets may be based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates. Local securities markets may also trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. It will likely be more costly and difficult for the sponsor to enforce the laws or regulations of a foreign country or trading facility. It is possible that the foreign country or trading facility may not have laws or regulations which adequately protect the rights and interests of investors.
Credit Risk
The risk that a security’s issuer, guarantor or counterparty of a security is unable to or unwilling to make dividend, interest, principal payments, or meets its obligation on a security and the risk that the value of a security may decline because of concerns about the issuer’s ability or willingness to make such payments and meet its obligations. For defined outcome unit investment trusts. the Options Clearing Corporation (OCC) acts as guarantor and central counterparty with respect to the FLEX Options. As a result, the ability of the trust to meet its investment objective depends on the OCC being able to meet its obligations.
Currency Risk
Certain unit investment trusts invest in securities traded in foreign securities markets. The value of the securities may be dependent on currency exchange rates. The U.S. dollar value of these securities may vary with fluctuations in foreign exchange rates.
Commodities Risk
Certain unit investment trusts invest in commodities or commodities related securities. Commodity prices are subject to several factors including, price and supply fluctuations, excess capacity, economic recession, domestic and international politics, government regulations, volatile interest rates, consumer spending trends and overall capital spending levels.
Preferred Securities Risk
Certain unit investment trust portfolios invest in preferred securities. Preferred securities are equity securities of the issuing company which pay income in the form of dividends. Trust preferred securities are limited-life preferred securities generally issued in the form of interest-bearing notes or preferred securities, distributions on which are treated as interest rather than dividends for federal tax purposes in some cases. Preferred securities do not generally have the growth potential of common stocks. They are also sensitive to interest rate changes and the market price generally falls with rising interest rates. In addition, they are more likely to be called for redemption in a declining interest rate environment. In the event of an issuer’s bankruptcy, preferred securities will not be repaid until the issuerʼs other debt securities, which have priority, have been satisfied. Income payments on preferred securities may generally be deferred without default, although such payments will continue to accrue until paid.
REITs Risk
Certain unit investment trusts invest in real estate investment trusts (REITs). An investment in a portfolio containing REIT securities is subject to additional risks including limited diversification. Companies involved in the real estate industry are subject to changes in the real estate market, vacancy rates and competition, volatile interest rates and economic recession.
MLP Risk
Certain unit investment trusts invest in Master Limited Partnerships (MLPs) and are subject to the risks generally applicable to companies in the energy and natural resources sectors, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk. There are certain tax risks associated with MLPs, including the risk that U.S. taxing authorities could challenge the trust's treatment of the MLPs for federal income tax purposes. These tax risks could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of the trust's investments.
Convertible Securities Risk
Certain unit investment trusts invest in convertible securities. Convertible securities are bonds, preferred stocks and other securities that pay a fixed rate of interest (or dividends) and will repay principal at a fixed date in the future. However, these securities may be converted into a specific number of common stocks at a specified time. As such, an investment in convertible securities entails some of the risks associated with both common stocks and bonds.
Options & FLEX® Options Risk
Certain unit investment trusts invest in options. Options are subject to various risks including that their value may be adversely affected if the market for the option becomes absent, less liquid or smaller. In addition, options will be affected by changes in the value and dividend rates of the stock or reference security subject to the option, an increase in interest rates, a change in the actual and perceived volatility of the stock market, stock, reference security, and the remaining time to expiration. Option contract positions may experience high volatility, significant downside, and may also expire worthless.
Defined outcome unit investment trusts invest in FLEX® Options which are customizable equity or index option contracts available through national securities exchanges that allow both the writer and purchaser to negotiate various terms and are guaranteed for settlement by the Options Clearing Corporation (OCC). Defined outcome unit investment trusts bear the risk that the OCC will be unable or unwilling to perform its obligations under the FLEX Options contracts. FLEX Options are listed on the CBOE, but no one can guarantee that a liquid secondary trading market will exist for the options. Trading in FLEX Options may be less deep and liquid than certain other securities as well as non-customized options. A less liquid trading market may adversely impact the value of the FLEX Options and the trust units.
Exchange-Traded Fund Risk
Certain unit investment trust portfolios invest in shares of exchange-traded funds. Exchange-traded funds are subject to various risks, including managementʼs ability to meet the portfolioʼs investment objective, manage the portfolio when the underlying securities are redeemed or sold, manage during periods of market turmoil and as investorsʼ perceptions regarding ETFs or their underlying investments change. ETFs may, in some circumstances, trade at a discount or premium from their net asset value in the secondary market.
Investors will bear not only their share of the trustʼs expenses, but also those of the underlying exchange-traded funds. By investing in other exchange-traded funds, the trust incurs greater expenses than investors would incur if they invested directly in the exchange-traded funds.
Closed-End Fund Risk
Certain unit investment trust portfolios invest in shares of closed-end portfolios. Investors will bear not only their share of the trust's expenses, but also those of the underlying funds. By investing in other funds, the trust incurs greater expenses than investors would incur if they invested directly in the funds. Shares of closed-end funds frequently trade at a discount to their net asset value in the secondary market and the net asset value of closed-end fund shares may decrease.
Certain closed-end funds may employ the use of leverage in their portfolios. While leverage often increases the yield of a closed-end fund, it also increases risk. This risk includes the likelihood of increased volatility and the possibility that the closed-end fund's common share income will fall if the dividend rate on the preferred shares or the interest rate on any borrowings rises.
Certain unit investment trust portfolios invest in Business Development Companies (BDC). BDCs are closed-end funds that have elected to be treated as business development companies and their ability to grow their overall financial condition is impacted significantly by their ability to raise capital, engage in borrowing, acquire suitable investments, and maintain their status as a BDC. Failure to do so will adversely affect the value of a BDCʼs shares. BDCs generally employ leverage in their portfolios. While leverage often increases the yield of a portfolio, it may magnify the potential for gains and losses on amounts invested, and accordingly, may increase the volatility and/or risks associated with those shares. A BDCʼs investments are frequently not publicly traded, and as a result, there is uncertainty as to the value and liquidity of those investments. BDCs are subject to laws or regulations governing BDCs that could negatively affect the value of the BDC shares. Shares of BDCs frequently trade at a discount to their net asset value in the secondary market and the net asset value of a BDCʼs shares may decrease.
Fixed Income Risk
Certain unit investment trust portfolios invest in fixed income securities. Fixed income securities are subject to various risks, including interest rate, credit, call, issuer default, liquidity, and quality risk. In general, the value of the fixed income securities will fall if interest rates rise. In a declining interest-rate environment, the portfolio may generate less income. Additionally, bonds in an underlying fund may be called by the issuer, which may decrease the overall income potential of the portfolio. A security issuer may be unable to make interest and/or principal payments in the future. Also, the longer the period to maturity, the greater the sensitivity to interest rate changes.
Below Investment Grade Risk
Certain unit investment trust portfolios invest in high yield securities. High yield bonds are generally below investment grade quality ("junk" bonds). Investing in such bonds should be viewed as speculative and investors should review their ability to assume the risks associated with investments which utilize such bonds. High yield securities are subject to numerous risks including higher interest rates, economic recession and deterioration of the junk bond market, possible downgrades and defaults of interest and/or principal. Junk bond prices tend to fluctuate more than higher rated bonds and to a greater degree affected by short-term credit developments.
Defined Outcome Risks
Defined outcome investments have characteristics unlike many other traditional investment products and are not for all investors due to their complexity and illiquidity. The following risks are associated with defined outcome unit investment trusts. It should not be considered a complete list of all possible risks associated with defined outcome unit investment trusts currently available in the marketplace.
Defined Outcome Capped Upside Risk
Unitholders may be subject to a capped upside return that represents the maximum percentage return per unit a defined outcome unit investment trust seeks to provide at the termination date and will vary based on account types and expenses. Investors that purchase units at a price that is above the initial price will have a capped upside return that is less than the stated capped upside return in the investment objective and may be subject to greater loss than the stated maximum loss.
Defined Outcome Circumstances Risk
Certain circumstances like differing expenses than estimated, the impact of redeeming unit holders prior to termination, the trust may not be able to maintain the proportional relationship among the options in the portfolio, or changes to laws regarding the treatment of options may all affect the unit investment trust’s ability to achieve its objective.
Defined Outcome Performance Risk
The returns of any defined outcome UIT will be affected by sales charges, organization costs, operating expenses and any additional fees and expenses that may be incurred. A defined outcome UITs performance may be impacted by a variety of factors, including but not limited to, redemption activity, unusual economic events, market movements, and changes in the pricing and liquidity of the FLEX options. In an event where the proper ratios between the FLEX options cannot be maintained, there may be significant impact to a defined outcome UIT’s ability to achieve its objective or defined outcome.
Defined Outcome Hold Period Risk
The ability of a defined outcome unit investment trust to provide its investment objective is dependent on investors over the life of the trust (purchasing units on the initial offer date and holding them until the termination date). Investors purchasing units after the initial offer date or redeeming units prior to the termination may experience different results from the investment objective.
Defined Outcome Market Risk of the Reference Security or Securities
FLEX Options represent indirect positions in a reference security or securities and are subject to risks associated with changes in the value as the price of the reference security or securities rises or falls. The investment in the FLEX Options includes the risk that their value may be affected by market risk related to a reference security, the underlying index, and the value of the securities in the underlying index held by a reference security. While the FLEX Options are individually related to the reference securities, the return on the FLEX Options depends on the price of the reference securities at the close of the NYSE on the FLEX Option expiration date and will be substantially determined by market conditions and the reference securities and the value of the securities comprising the reference securities as of such time.