What is ‘Yield Tilt Index Fund’
A type of mutual fund that allocates capital as a standard index, 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.
Explaining ‘Yield Tilt Index Fund’
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”, meaning that they are taxed once at the corporate level and then once again at the shareholder level.
Due to this effect, 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.
Further Reading
- A macro‐finance model of the term structure, monetary policy and the economy – academic.oup.com [PDF]
- What moves sovereign bond markets? The effects of economic news on US and German yields – papers.ssrn.com [PDF]
- A re-examination of the predictability of economic activity using the yield spread – www.nber.org [PDF]
- Reaching for yield in corporate bond mutual funds – academic.oup.com [PDF]
- The fantastic world of finance: Progress and the free lunch – www.jstor.org [PDF]
- Islamic mutual funds' financial performance and international investment style: evidence from 20 countries – www.tandfonline.com [PDF]
- On the economic consequences of index-linked investing – www.nber.org [PDF]
- Risk and return: A new look – www.nber.org [PDF]
