What Is a Tilt Fund?

A tilt fund is a type of mutual fund or exchange-traded 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.

Key Takeaways

  • Tilted funds are benchmarked against common index funds and then enhanced with additional securities that "lean" towards a certain investment strategy, in an effort to outperform the baseline fund.
  • Various tilted funds place their investments in additional securities on factors such as P/E ratios, amount of dividends paid, or specific categories of stocks in order to improve financial performance.

Understanding Tilt Funds

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 companies found on the S&P 500 stock exchange. 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. On the other hand, value tilts in a fund may also lean towards one type of stock over another, such as leaning towards small-cap stocks that historically have provided higher-than-average returns.

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.

Examples of Tilted Investments

Some examples of popular tilted funds include SPDR's S&P 1500 Value Tilt ETF (VLU). VLU typically mimics the returns of the S&P 1500 Low Valuation Tilt Index. However, the difference with this ETF is that it flips the script on valuations: it overweights stocks with relatively low valuations and underweight stocks with higher valuations. The index also specifically looks for funds based on the P/E ratio, price to cash flow ratio, among other factors such as dividends paid. Another popular tilted fund is FlexShares' Morningstar US Market (TILT).

Weighted Tilting Investments

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.