What are closed-end funds, UITs and FAC companies?

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What are closed-end funds, UITs and FAC companies?

A closed-end investment company (CEF) is any management company other than an open-end company that issues a fixed number of shares through a registered broker-dealer in a single underwritten public offering that then trade freely in the secondary market at a premium or discount to the fund’s net asset value (NAV), depending of the supply and demand for the fund.

A closed-end fund can issue senior debt and senior equity securities, subject to asset coverage requirements, which can make it more volatile and risky than many open-end mutual funds.  There is no limit on the investment in illiquid assets.  A CEF can undertake follow-on offerings or at-the-market offerings to raise additional capital, stock repurchase programs or periodically tender for shares to reduce the discount at which shares are trading, or convert to an interval fund or an open-end fund, subject to shareholders approval.

A unit investment trust (UIT) is an investment company that is organized under a trust indenture, contract, custodianship, agency or similar instrument that does not have a board of directors and that issues only nonvoting redeemable securities (units), each of which represents an undivided interest in a portfolio of passively held assets.  Units are not actively traded and must be redeemable at their approximate net asset value (NAV) with the UIT sponsor upon an investor’s request.

A UIT is established either as a fixed UIT or a nonfixed UIT.  A fixed UIT that will automatically terminate and dissolve when the underlying assets mature.  A nonfixed UIT is a contractual plan established for the contractual periodic investing of a fixed amount in mutual funds over an extended period of time (e.g., 10-15 years), that holds the shares for the benefit of the investors, and that issues redeemable periodic payment plan certificates representing ownership interest in the periodic payment plan.  Some exchange-traded funds (ETFs) are structured as UITs.

UITs as Exchange-Traded Funds on 6 Sept 2017 (Example)
Symbol Name Price Assets Avg. Vol. YTD
SPY SPDR S&P 500 ETF $246.06 $238,256,842 64,438,773 11.10%
QQQ PowerShares QQQ $144.69 $53,101,762 39,572,098 22.71%
MDY SPDR S&P MidCap 400 ETF $313.33 $17,872,177 1,157,852 4.29%
DIA SPDR Dow Jones Industrial Average ETF $217.67 $17,530,207 2,559,331 11.85%
Source: ETFdb

A face-amount certificate company is a registered investment company that is engaged in the business of issuing face-amount certificates of the installment type or that has such certificates outstanding – only a few still remain in existence because tax changes have eliminated their tax advantages.  A face-amount certificate (FAC) is the contract between an investor and a face-amount certificate company under which the investor agrees to pay the issuer a set amount of money either as a lump sum or in periodic installments in return for the issuer’s guarantee to pay the instrument’s face value at some set date in the future.


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2018-07-12T08:17:44+00:00

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