Many investors in the stock market prefer the clarity of buying stocks directly - you know the costs and have some means of judging the likely success of a direct investment.
However, you should not ignore the possibilities of using other tools that may help you accomplish you financial goals. Besides bonds, you may want to include mutual funds and exchange traded funds to solve particular investment goals (diversification, broad market coverage, sector plays and so on)
Closed-end funds and unit investment trusts are types of funds that are close relatives to mutual funds and exchange traded funds but have some unique characteristics of their own. In this article, you'll learn about these two hybrid investment vehicles.
Closed-End Funds
Closed-end funds raise an initial sum of money through a public offering and then close the fund to new investment. Shares of the fund then trade on stock exchanges like stocks. The price of the fund may be at a discount or premium to the net asset value.
The funds specialize in certain investment areas such as real estate stocks, foreign markets stocks from a single country, and so on. Whether the fund is trading at a premium or discount may depend on how investors view the assets held in the trust.
Expenses are important, just like in open-end mutual funds, and expense ratios greater than 1.5 percent should be viewed with caution.
Because closed-end funds can swing from a discount to a premium, investors should watch prices carefully before buying. It is usually not a good idea to pay a premium for a closed-end fund. You can find information on prices and whether the fund is selling at a premium or discount at MorningStar.com.
Another important consideration is that with many funds, you can't redeem your shares back. The shares trade on the stock exchange, however if there are no buyers (or sellers) you can't redeem your shares with the fund unlike open-ended mutual funds where the fund will redeem your shares.
You can find more information at the Closed-End Fund Association on performance and other news.
Unit Investment Trusts
Unit investment trusts are often sold by brokers associated with financial institutions, such as insurance companies. Unit Investment Trusts buy a large block of income producing securities (most often bonds) and are then sold to investors. Investors should use caution, not because the sellers are untrustworthy, but because there is no easy way for consumers to compare performance.
A unit investment trust is a collection of securities - stocks, bonds, mortgage-backed securities, and so on - that is put together as a package and then sold in units.
There is no management of the assets. The unit is usually left to generate income through interest or dividends, which is distributed to investors. If it is a bond unit, it will dissolve when the bonds mature and the investors will be paid the principal.
Unit investment trusts are a popular way to hold bonds because investors can buy units in increments of $1,000 instead of a much larger commitment that individual bonds may require. Since the trusts holds the bonds, investors know they will provide a steady income stream.
The main concern with unit investment trusts may be the sales pressure of brokers who want to sell out the units quickly and the lack of comparison data.
Unit Investment Trusts can also invest directly in real estate, oil and gas properties and other illiquid investments - something most other common securities can't do. While this offers some direct exposure to certain markets, units may not trade as easily as other investments that are more liquid.
