Yield Tilt Index Fund

A yield tilt index fund is a fund type that invests in securities that reflect the assets of a market index, but have a higher weight in favor of highly profitable investments. A yield tilt index fund can also be a mutual fund that is a basket of securities or an exchange-traded fund (ETF), reflecting an index of stocks. 

Yield Tilt Index Fund work principle

As a rule, an index fund includes all of the securities of a certain stock index, for example, the S&P 500 Index. The acquisition of the index itself as a whole is not possible for an investor, since any of the indices serves only as an indicator of the state of the securities market and helps to track both the state and trends of the stock market, and the current moment in the economic cycle. 

However, a purchase of a fund that includes all these stocks from this index is available to investors, for example, they can buy an exchange-traded fund that consists of all 500 shares of the S&P 500 index. Investing in a tilt fund for an investor is an opportunity not only to hold an index, but also to regularly increase profits.

Tilted funds include all of the shares of an index that is considered to be a benchmark, plus they contain investments that tilt the fund towards a particular investment strategy. Many stocks are dividends-paying, and it is considered to be cash rewards to investors for owning a company’s shares. A tilted fund can not only reflect the index, but also include more stocks that pay high dividends.

In addition, some funds distribute dividends among their clients, because the fund itself receives dividends from the stocks it contains. Nevertheless, the situation of reinvesting dividends in a fund is more common. In this situation, the ownership of shares in a particular index fund is not associated with the receipt of real dividends by the investor, however, reinvestment will be expressed in an increase in the price of the fund's shares.

Yield Tilt Index Fund weighting explained

By weighting the assets of a standard index fund in favor of stocks which dividends are higher, a yield tilt index fund increases the return of a standard index fund. In other terms, securities paying dividends are highly attractive to investors and carry more weight in the portfolio and ultimately form a larger portion of the fund's portfolio than in a standard index. The "tilt" of the fund's yields is because of the greater weighting in this direction. 

As a result, the fund tends to receive not a usual, but a higher dividend yield, and in addition, it follows the general investment strategy of holding the benchmark index.

Yield Tilt Index Fund advantages

A yield tilt index fund helps the fund exceed the underlying fund. Many companies that pay dividends on stocks have proven themselves and in order of paying quarter dividends, for example, a company needs to be well-established and consistently generate profits. Therefore, a fund that focuses on companies that pay dividends on a regular basis can increase the return on investment in the fund by overloading it with the most profitable companies. The invested funds are distributed among the companies and the fund is diversified due to the use of the underlying benchmark index in the fund's investment strategy of a yield tilt index fund.

A diversification allows a fund to reduce the risk of losses if several companies that are included in it face financial difficulties. Financially healthy companies that perform well as part of the fund can also continue to perform better, thereby offsetting the burden from troubled firms. Due to the fact that the fund's focus is shifted to dividend stocks, the fund can move in the same direction as the market, gradually increasing dividend incomes with little added risk.

In order to lose money in an index fund, each individual stock that is part of the fund must zero out. In addition, the owner of the fund will have to file for bankruptcy without the possibility of selling his assets, in order to cover debts to the fund holders. All of these scenarios are nearly impossible, making it safe to invest in index funds. When a yield tilt index fund has the right set of investments, it can secure investors with an increased yield along with the safety that comes with investing in index funds.

A yield tilt index fund is a good index tracking option for an investor to follow the goal of a dividend based strategy. This type of fund has a risk-averse nature because of diversification, but also provides a tilt towards companies that provide a steady stream of dividends.

Taxation of Yield Tilt Index Funds

The yield tilt index fund offers the investor who wants to reduce the tax liability closely associated with their assets some tax benefits. In some cases, double taxation is applied to dividend payments. As a result, an investor pays income tax on the same amount twice - first at the corporate level, and later at the shareholder level.

Public opinion is divided on this issue. Some believe that wealthy investors can only receive investment income by paying enough taxes and this is quite fair, while others are of the opinion that such double taxation is unfair, since it creates an additional burden for successful investors, and therefore, is a clear obstacle to investment as a whole.

Here it should be mentioned the existence of the tax shelter strategy. There is an opinion among investors that in order to ensure higher returns on high-yield stocks and compensate for negative tax consequences, the price of high-yield stocks should be valued by the market using a certain discount in relation to other shares.

The hypothesis is that an investor who purchases a yield tilt index fund in a tax-sheltered investment account (this may be an individual retirement account), is able to outperform the index due to the perceived benefit of the valuation, while at the same time, this investor is protected from taxes on dividends.

This strategy is suitable for a highly qualified, experienced investor who is able to understand the complex elements of this structure, as well as be fluent in the relevant tax regulations. The tax-advantaged strategy of owning a yield tilt index fund in these accounts implies that investors will purchase these types of funds as an ETF.