Open-end, UIT, or grantor trust?

ETFs may be structured in a number of ways:

While they may sound like pieces in a board game, Spiders, Diamonds, and Qubes are names for the popular ETFs that track some of the best-known indexes. Spiders, which take their name from the acronym for Standard and Poor’s Depository Receipts (SPDR) , track the S&P 500. DIAMONDs are based on the Dow Jones Industrial Average (DIA). And Qubes, which track the tech-heavy Nasdaq 100 Index, are named for the ticker symbol QQQQ. Structured as Unit Investment Trusts, these are some of the most widely traded investments because they provide exposure to important parts of the market.

Open-end index fund: Many ETFs follow this structure, which closely resembles open-end mutual funds. These funds immediately reinvest their dividends and pay them out to shareholders on a quarterly schedule. Registered with the SEC, these funds are permitted to use derivatives, portfolio optimization, and other strategies to manage costs, improve returns, and minimize tracking errors. The majority of ETFs follow this structure because it offers the greatest flexibility.

Unit Investment Trust (UIT): UITs are sometimes considered a separate category of investment from ETFs. But in terms of their legal structure, they’re a subset. And in fact, some of the oldest and best-known ETFs — including DIAMONDs, SPDRs, and Qubes — are organized as UITs.

UITs, which are registered with the SEC, must invest in a fixed portfolio of securities, such as all the securities on an underlying index. The securities are held in a trust, and units, or shares, of the trust are sold to investors and trade in the secondary market after issue.

One of the things that sets UITs apart from ETFs is that they have an expiration date. Bond UITs expire when the bonds in the portfolio mature. Equity UITs also expire on a specified date, from one year to several decades, but they can be rolled over, or extended, which customarily happens.

UITs do not reinvest dividends in the fund, but simply hold onto them until they’re paid to shareholders quarterly or annually — creating a situation called “dividend drag.” While UITs originated as a conservative bond investment vehicle, a range of equity UITs are available.

Grantor Trust: Because other ETF structures weren’t suited to hold commodities, such as gold, silver, or euros, grantor trusts were designed for that purpose. The original composition of the underlying basket of securities stays fixed, so a grantor trust doesn’t rebalance. If the grantor trust holds securities rather than commodities, as is sometimes the case, this means that over time, the basket can become more concentrated, as companies merge or are acquired.

A grantor trust distributes dividends directly to shareholders, and investors retain their individual voting rights associated with the securities owned by the fund. The HOLDR family of funds are grantor trusts, as are commodity ETFs. Unlike other ETFs, grantor trusts are not SEC-registered investment companies.

As the demand for new ETF products grows, new legal structures continue to emerge to accommodate them. For instance, investment companies have recently developed a fourth category of ETF to enable funds to track commodities and other assets using futures contracts.


	Open-end fund (ETF)	Unit investment trust (UIT)	Grantor trust

Registered with SEC	Yes	Yes	No

Specific termination date	No	Yes	No

Reinvests dividends	Yes	No	No

Fixed, unchanging portfolio	No	Yes	Yes

Able to hold commodities portfolios	No	No	Yes

Cost efficient	Yes	Sometimes	Yes

Tax efficient	Yes	Yes	Yes

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