What Is a Tilt Fund?
Let me explain what a tilt fund is directly to you: it's a mutual fund or exchange-traded fund that starts with a core holding of stocks tracking a benchmark index, then adds extra securities to tilt the overall performance toward outperforming the market.
Key Takeaways
You should know that tilt funds are benchmarked against standard index funds and improved with additional securities that lean into specific investment strategies to beat the baseline. These funds invest in extra securities based on factors like P/E ratios, dividend amounts, or particular stock categories to boost financial performance.
Understanding Tilt Funds
I see tilt funds as enhanced index funds because they build on basic index funds with more options. Major investors use them to improve returns. These funds can benchmark against any global index, but in the US, managers often use the S&P 500 or similar broad indexes to measure performance, allowing them to follow the market's general direction.
Fund managers turn to tilt funds for faster returns while keeping safety by sticking to large, mainstream stocks without straying too far from the index. This means tilt funds can outperform the market with relatively low risk. Historically, pension funds favor them for this less-risky approach. The right tilt mixes active and passive styles for both safety and performance.
Consider a typical index fund that invests only in S&P 500 companies. A tilt fund might put most capital there but give the manager flexibility to add other stocks. Value tilts could favor small-cap stocks for their higher historical returns.
Managers select tilt stocks by targeting high-performing sectors, low P/E ratios, or even short positions to profit from falling stocks.
Examples of Tilted Investments
Take SPDR's S&P 1500 Value Tilt ETF (VLU) as an example; it tracks the S&P 1500 Low Valuation Tilt Index but overweights low-valuation stocks and underweights high ones, focusing on P/E ratios, price-to-cash-flow, and dividends. Another one is FlexShares' Morningstar US Market (TILT).
Weighted Tilting Investments
Tilt funds can also boost returns by weighting investments, giving more emphasis to stocks expected to outperform others in the index. Some invest heavily in high-dividend stocks for extra capital from dividends plus price gains; these are called yield tilt index funds.
