Market Index Target-Term Security (MITTS)
What it is:
How it works (Example):
First conceived by Merrill Lynch, a MITTS is a debt obligation that exposes an investor to upside fluctuations in a stock market index such as the Dow Jones Industrial Average (DJIA) or S&P 500 Index.
A MITTS has a lifespan of one year from the date of issue and has the potential to earn returns corresponding to the increase in its assigned index. If the index increases, investors receive the initial amount they invested plus an amount of money corresponding to the percentage gained by the index. If the assigned index declines, investors receive no less than their original investment.
For example, suppose Bob purchases one unit of a MITTS based on the Dow Jones Industrial Average for $100. At maturity, the Dow Jones has risen by 15%. Consequently, Bob receives $115, which includes his initial $100 investment combined with $15 (representing the proportional 15% index gain. Had the Dow Jones lost value or remained unchanged, Bob would still be guaranteed the $100 he initially invested in the MITTS.
Why it Matters:
Despite the loss constraints and reasonable lifespan to maturity, MITTS have several disadvantages investors must be aware of. First, MITTS are taxed regardless of whether the underlying index experiences gains or losses. Second, holders are strictly prohibited from selling MITTS prior to the maturity date.