Tilt Fund

A tilt fund is a type of mutual fund that includes a core holding of stocks that mimic a benchmark type index, to which additional securities are added to help tilt the fund toward outperforming the market.

Tilt funds are also sometimes called enhanced index funds, since they are essentially index funds with more options. These funds are typically used by major investors in an effort to improve overall investment returns. Tilt funds can be benchmarked against any index in the world, but American fund managers typically use the Standard & Poor’s 500 Index (S&P 500) or another broad-based index as the benchmark against which the performance of a tilt fund is measured, giving them the ability to keep pace with the general direction of the overall market.

Fund managers use tilt funds to obtain accelerated returns from their investments while maintaining a certain level of safety by sticking with large, mainstream stocks and not diverging too far from an index. Therefore, while tilt funds have the potential to outperform the broader market, the risk they take on to achieve superior returns is considered to be relatively low. Because of their strategy of less-risky investment, tilt funds have historically been popular with pension funds. The right mix, or tilt, of stocks provides both safety and performance by combining elements of active and passive index fund styles.

A typical index fund may, for example, invest exclusively in S&P 500 companies. A fund that utilizes a tilting strategy might have the vast majority of capital invested in those 500 companies, but it might also allow the manager the flexibility to include other stocks as well.

Tilt fund managers use several methods to choose these tilt stocks, including looking for certain high-performing sectors and stocks with a low price-to-earnings ratio. Some managers also aim for better performance by taking a “short” position, or buying a stock and making a profit if it goes down.

Another way that a tilt fund can work toward increasing returns and outperforming an index fund is by weighting its investments, thereby giving more weight to certain stocks within the index that are projected to outperform the others. Certain tilt funds may also invest more heavily in stocks with high dividend payments, which generates capital in addition to that which is earned from rising stock prices. This type of weighted tilt fund is known as a yield tilt index fund.