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2.16 UITs & REITs

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Securities Industry Essentials SIE

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1 Introduction

About the SIE Exam How to Use This Course

2 Chapter 1: Knowledge of Capital Markets

1.1 Regulatory Bodies 1.2 State Regulation 1.3 Market Participants 1.4 Types of Markets 1.5 The Exchanges 1.6 OTC Markets 1.7 Economic Policies 1.8 Interest Rates 1.9 Business Cycles 1.10 International Economics

3 Chapter 2: Understanding Products and Their Risks

2.1 Common Stock Basics 2.2 Corporate Actions 2.3 Preferred Stock 2.4 ADRs 2.5 Bond Basics 2.6 Yields 2.7 U.S. Treasury Securities 2.8 Corporate Bonds 2.9 Municipal Bonds 2.10 Money Market Instruments 2.11 Options Basics 2.12 Hedging Strategies 2.13 Mutual Funds 101 2.14 Mutual Fund Fees 2.15 ETFs 2.16 UITs & REITs 2.17 DPPs 2.18 Systematic Risk 2.19 Non-Systematic Risk 2.20 Mitigation Strategies

4 Chapter 3: Trading, Customer Accounts and Prohibited Activities

3.1 Order Types 3.2 Trade Settlement 3.3 Quoting 3.4 Account Types 3.5 Account Registration 3.6 Retirement Plans 3.7 Education Savings 3.8 AML Rules 3.9 Market Manipulation 3.10 Insider Trading 3.11 Customer Protection

5 Chapter 4: Overview of Regulatory Framework

4.1 Registration 4.2 Continuing Education 4.3 Employee Conduct 4.4 Correspondence

2.16 UITs & REITs

Key Takeaways Explain This Topic AI

UITs hold a fixed portfolio with no active management, have predetermined termination dates, and no board of directors or investment adviser during trust life

REITs must have 75% of assets in real estate, earn 75% of income from real estate, and distribute 90% of taxable income to shareholders

Equity REITs own and operate income-producing properties; mortgage REITs lend money to real estate owners and earn interest

REITs trade on exchanges like stocks and provide liquidity, diversification, and professional real estate management without directly owning property

UITs have lower management fees than mutual funds due to buy-and-hold approach but lack flexibility to adjust portfolio

Last updated: January 2026

Unit Investment Trusts (UITs) & Real Estate Investment Trusts (REITs)

UITs and REITs are two types of pooled investment products that offer unique characteristics compared to mutual funds and ETFs. Understanding their structures, benefits, and limitations is important for the SIE exam.

Unit Investment Trusts (UITs)

A Unit Investment Trust (UIT) is a type of investment company that purchases a fixed portfolio of securities and holds them until a predetermined termination date.

Key UIT Characteristics

  • Feature Description
  • Portfolio Fixed—does not change after creation
  • Management Unmanaged—no active buying/selling
  • Termination date Predetermined dissolution date
  • Redeemable Units can be redeemed at NAV
  • Board of directors None
  • Investment adviser None during trust life
  • How UITs Work
  • Sponsor creates trust and selects securities
  • Fixed number of units issued to investors
  • Trust holds securities with little or no change
  • Income distributed to unit holders
  • Trust terminates on predetermined date
  • Assets sold and proceeds distributed
  • Types of UITs
  • Type Description Typical Term
  • Equity UITs Hold stocks, often grouped by theme 15-24 months
  • Bond UITs Hold bonds until maturity Matches bond maturities
  • UIT Redemption Options

Investors can:

  • Hold to termination : Receive proportional share of liquidation proceeds
  • Redeem early : Sell units back to sponsor at current NAV
  • Sell in secondary market : Some sponsors maintain a market for units
  • UITs vs. Mutual Funds
  • Factor UITs Mutual Funds
  • Portfolio Fixed Actively managed
  • Management fees Lower (no adviser) Higher
  • Termination Yes—specific date No—perpetual
  • Sales charges Front-end Front or back-end
  • Trading Redeemable with sponsor Redeemable at NAV

Key Point: UITs have no investment adviser making decisions after creation. The "buy and hold" approach results in lower management fees but no flexibility.

Real Estate Investment Trusts (REITs)

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs allow investors to invest in real estate without directly buying property.

REIT Requirements

To qualify as a REIT under the tax code:

  • Requirement Rule
  • Asset test 75% of assets in real estate
  • Income test 75% of income from real estate
  • Distribution Must distribute 90% of taxable income
  • Shareholders Minimum 100 shareholders
  • Ownership limit Five or fewer cannot own more than 50%
  • Structure Managed by board of directors
  • Types of REITs
  • Type Invests In Income Source
  • Equity REITs Physical properties Rent from tenants
  • Mortgage REITs Mortgages and loans Interest on debt
  • Hybrid REITs Both properties and mortgages Rent and interest
  • Equity REITs (Most Common)
  • Own and operate commercial real estate
  • Properties include: apartments, offices, retail, hotels, healthcare facilities
  • Generate income from rent collection
  • Can benefit from property appreciation
  • Make up approximately 90% of REITs
  • Mortgage REITs (mREITs)
  • Lend money to real estate owners
  • Invest in mortgages or mortgage-backed securities
  • Generate income from interest payments
  • Do NOT benefit from property appreciation
  • More sensitive to interest rate changes
  • REIT Tax Treatment

The conduit tax treatment (Subchapter M):

  • REITs distribute 90% of taxable income → avoid corporate-level tax
  • Dividends taxed as ordinary income to investors (not qualified dividends)
  • Investors may also receive return of capital distributions

Important: REIT dividends are generally taxed as ordinary income, NOT at the lower qualified dividend rate.

REIT Advantages and Disadvantages

  • Advantages Disadvantages
  • Real estate exposure without direct ownership Dividends taxed as ordinary income
  • Professional management Sensitive to interest rates
  • Liquidity (publicly traded REITs) Market price volatility
  • Diversification across properties Cannot deduct property losses
  • High dividend yields No control over property decisions
  • Traded vs. Non-Traded REITs
  • Type Trading Liquidity Pricing
  • Publicly traded Exchange-listed High Market price
  • Non-traded public Not exchange-traded Low Periodic NAV
  • Private Not registered Very low Appraisal-based

Warning: Non-traded and private REITs have significant liquidity risk—investors may not be able to sell when needed.

UITs vs. REITs Comparison

  • Factor UITs REITs
  • Investment type Stocks or bonds Real estate
  • Structure Trust Corporation or trust
  • Termination Yes No
  • Pass-through losses No No
  • Management None Active management
  • Liquidity Moderate High (if traded)
  • Key Takeaways

UITs:

  • Fixed portfolio with no active management
  • Terminate on a predetermined date
  • Lower fees but no flexibility
  • Redeemable with sponsor at NAV

REITs:

  • Invest in real estate properties or mortgages
  • Must distribute 90% of income to maintain tax status
  • Dividends taxed as ordinary income
  • Provide real estate exposure with market liquidity