What is a Yield Tilt Index Fund?
A yield tilt index fund is a mutual fund that mirrors a specific stock index but gives extra weight to stocks within the index that offer high dividend yields.
How Does a Yield Tilt Index Fund Work?
Let's assume the XYZ mutual fund is a yield tilt index fund. The fund mirrors the S&P 500 index, meaning that it invests in the same stocks as the index. However, instead of investing in the S&P stocks at the same weights and proportion as the S&P index itself, the XYZ mutual fund gives heavier weight to S&P 500 stocks that have high dividend yields.
Why Does a Yield Tilt Index Fund Matter?
Depending on tax policy at any given moment in time, dividend income is sometimes taxed at higher rates than capital gains. In theory, the market compensates for this additional tax burden by placing a lower value on these stocks -- thus giving them higher dividend yields. Therefore if an investor can purchase a yield tilt index fund through a tax-sheltered investment account (such as an IRA), the investor might use the fund to outperform the underlying stock index because the dividends are sheltered.