What it means
A plain index fund buys every share in an index in the same proportions as the index. A tilt fund starts there but then nudges the weights.
It might hold more value shares (companies that look cheap compared with their earnings), more smaller companies, or more shares with high dividend yields. The tilt is usually modest and rule-based, rather than a bet on individual companies.
Because the fund still looks broadly like the market, it stays diversified, and the manager can charge a fee that is lower than a typical active fund. The hope is that the tilted characteristic will earn a bit more over the long run than the market as a whole.
Tilts are also used for values, not only returns. A fund may tilt away from certain industries, such as fossil fuels or tobacco, or tilt towards companies with strong governance ratings.
Investors need to read the fund description carefully, because the tilt defines the fund's behaviour. The cost of a tilt is that it can underperform the index for long stretches.
A value tilt can lag when growth shares are in favour, and a small-company tilt can lag when large companies lead. Investors who cannot tolerate being behind the market for several years may find the experience uncomfortable.
The way to measure a tilt is to compare the fund's weight with the index's weight. The difference is called the active weight, and the sum of the differences shows how far the fund departs from the index.
A fund with tiny differences is nearly an index fund, while a fund with large ones is closer to an active fund. When comparing tilt funds, look at three numbers together: the fee, the tracking error and the active weights.
Tracking error measures how far the fund's returns typically wander from the index, so a higher figure means the tilt is stronger and the ride will be bumpier. A fund with a big tilt and a high fee has two hurdles to clear before it adds any value for the investor.
In practice
Real-world examples.
Example
A family office wants low-cost exposure to the stock market but believes smaller companies will grow faster over the long term. It buys a fund that follows a broad index but carries a heavier weight in small companies, accepting that it will sometimes lag the index.
Example
A university endowment tilts its equity portfolio away from fossil fuel companies to match its stated values. The investment committee measures the tilt each year to confirm the fund is still within its agreed limit.
Example
A corporate pension scheme adds a value tilt to a portion of its equity holdings. The trustees agree that the tilt will be judged over at least five years, so that a short period of weak performance does not trigger a change.
Formula
Calculation
Active weight = fund weight - benchmark weight
Suppose a benchmark index holds 20% in technology shares, and a tilt fund holds 28% in technology shares.
Active weight = 28% - 20% = +8 percentage points.
With $500,000 invested, the fund holds 500,000 x 28% = $140,000 in technology, against 500,000 x 20% = $100,000 for the index. The tilt is therefore worth an extra $40,000 in technology exposure, which would be funded by holding less in other sectors.Case study
Seen in the real world.
Brightwater Foundation is an illustrative, fictional charity with a $10 million investment portfolio that funds its grants. The trustees were unhappy with the high fees on their active manager and wanted something cheaper that still reflected their belief in dividend-paying companies.
They moved $6 million into a tilt fund that follows a broad market index but holds a higher proportion of companies with stable dividends. The fee fell from 0.9% a year to 0.3%, saving $36,000 annually on the amount moved.
The illustrative trade-off was that the fund would not match the index exactly, and in one year it trailed by two percentage points when fast-growing technology companies surged. The trustees had agreed in advance to judge the fund over five years, so they stayed the course.
Watch out
Common mistakes.
- Treating a tilt fund as identical to an index fund, when it is designed to behave differently from the market.
- Judging the tilt over a single year, when the effect may take many years to appear.
- Ignoring the fees, since a higher fee can wipe out the extra return that the tilt aims to earn.
Questions
People also ask.
Is a tilt fund active or passive?
It sits between the two, because it follows a rules-based approach like a passive fund but deliberately departs from the market weights like an active fund.
What kinds of tilts are common?
Popular tilts include value, small company size, dividend yield, quality, low volatility and ethical or sustainability screens.
How do I check the size of a fund's tilt?
Compare the fund's holdings by sector or characteristic with the benchmark index and look at the difference in weights.
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