Mutual funds and UITs

QWhat’s the difference between mutual funds and unit investment trusts? — A.E., Pueblo, Colorado

AMutual fund managers buy and sell stocks, bonds and/or other assets according to a stated investment strategy. Shares are issued and redeemed on demand at a specific price (the “net asset value”) that’s calculated at the end of each trading day based on the total market value of the fund’s holdings. The number of shares is not fixed. If many people want to buy in, the fund company will issue more shares and will have more money to invest.

Unit investment trusts (UITs), on the other hand, typically debut via a one-time public offering and feature a relatively fixed portfolio of investments. While mutual fund holdings can change considerably over time, UIT holdings are meant to be held until the trust is liquidated at a specified date. Investors who want to trade UIT shares can generally do so in the secondary market. Unlike a mutual fund, UIT share prices in the secondary market may be priced above or below the net asset value of the trust’s actual holdings. UITs generally charge sales fees (or “loads”), while many mutual funds are noload.

QWhat happens to a stock’s P/E ratio when the stock splits? -K.B., Greenville, North Carolina

ASplits don’t change price-to-earnings (P/E) ratios. A company’s P/E ratio is simply its recent stock price divided by the annual earnings per share (EPS). A stock trading at $40 per share with EPS of $4 will have a P/E of 10 (40 divided by 4). If the stock splits 2-for-1, the shares will be priced at $20 and the EPS will also be halved, resulting in an unchanged P/E, as 20 divided by 2 is 10.