What is a Yield Tilt Index Fund
A yield tilt index fund is a type of mutual fund that allocates capital as a standard index, but with a weighted component.
BREAKING DOWN Yield Tilt Index Fund
A yield tilt index fund works by replicating the holdings of a specified stock index, such as the Standard & Poor's 500 Index (S&P 500), except that the fund weights its holdings towards stocks that offer higher dividend yields. Stocks with higher dividend yields are given a greater portfolio weighting, making them represent more of the fund's portfolio than they otherwise would in the standard index.
In other words, yield tilt index funds are mutual funds that replicate and mimic a specific index, but add extra bonus weight to those stocks within that index that offer higher yields. This the yield is “tilted” due to the heavier weighting in that direction. The structure of his type of fund can offer some tax benefits for investors who are seeking a way to minimize the tax liability associated with their holdings.
Yield Tilt Index Funds and Tax Issues
The rationale behind the creation of yield tilt index funds is based on the fact that dividend payments issued to shareholders can be subject to double taxation. This means that they are taxed once at the corporate level and then once again at the shareholder level. So the investor is essentially paying income taxes twice on the same single amount of income. Proponents of this taxation structure see it as a way to ensure the wealthy are paying their fair share, and cannot get rich off their investment earnings without paying a sufficient amount of taxes in return. Opponents, on the other hand, contend that this dual-level taxation is unfair and imposes an additional penalty on successful investors.
Due to the effect of double taxation, some investors contend that the market must value the share prices of high-yield stocks at somewhat of a discount to other stocks, so as to provide an increased return on high-yield stocks in order to compensate for the negative tax effects. The theory is that an investor who is able to purchase a yield tilt index fund in a tax-sheltered investment account may be able to outperform the index, since they receive the supposed valuation benefit but are sheltered from taxes on the dividends they receive.
This strategy would be a potentially smart option for a sophisticated investor who understands the intricate details of this structure, and who is familiar with the tax regulations involved, or has a financial advisor who is well-versed in the tax code.