What’s The Potential Of UITs?
As you can see, UITs are an attractive investment opportunity, but many financial advisors simply don’t have enough information to take advantage of them. Below is a list of benefits advisors can get excited about when digging deeper into UITs:
• Greater Transparency: One of the elements that makes UITs especially intriguing is their transparency. In 2008, investors didn’t really know what they were invested in, which, as we all saw, didn’t turn out well. UITs have a fixed portfolio, are extremely transparent on holdings and what they are buying, and only change under extreme circumstances, so advisors and investors won’t be surprised when they look into what they own. As they are professionally selected and prices are determined by the security values, it’s easy to evaluate them.
• Increased Research: Up until now, UITs haven’t taken off because there is not a lot of accurate, consolidated research and standardized data available for advisors to do their homework, and there have been limited resources to evaluate the investment as a long-term strategy. Having that information is crucial to the success of any investment, as evidenced by mutual funds and ETFs, which began to skyrocket in popularity when companies like Morningstar began providing research and ratings. Those unfamiliar with UITs may think they look similar to mutual funds, but when you get into the weeds, they’re constructed entirely differently. Now, with better data and tools to understand and evaluate UITs, there is an opportunity for advisors to increasingly utilize them within their passive strategies, which makes UITs far more viable.
• Thematic Opportunities: UITs touch on so many different strategies and sectors, similar to ETFs. However, where UITs that might be able to provide alpha are those that utilize a thematic allocation strategy. ETFs will often have hundreds of securities within their holdings, but with UITs, you can create an investment product with 10-15 stocks based upon a specific trend. One example is the First Trust’s Sabrient Baker’s dozen, which packages a list of 13 stocks that are believed to be undervalued and likely to appreciate. Thematic UITs are nimble and precise enough to capture those securities and only those securities.
The Case For UITs
I like to think of UITs as adding value through “addition by subtraction.” When evaluating other packaged products, you might find that one has 100, 200 securities in it, but it’s unrealistic to think each one of them is going to be great. UITs present the opportunity to get rid of the securities that are underperforming.
With the DOL fiduciary rule around the corner, it’s imperative that advisors have the data and resources to justify their investments. As you know, every client has a very different risk profile, time horizon, and set of individual needs and investment goals. To make sure you’re providing the best possible investment service, you need to know everything you can about what you’re investing in. Adding UITs into the mix could present financial advisors with a supplemental strategy to increase returns, diversify portfolios and keep clients happy.
Randy Watts is co-founder and CEO of UIT Investing Inc.