How can screens and tilts be used together in index construction?

How can screens and tilts be used together in index construction?

• A. An index might tilt toward positive ESG characteristics while applying limiters.
• B. Tilts cannot be combined with screens.
• C. Screens and tilts are mutually exclusive.
• D. An index might tilt toward ESG characteristics while applying limited values-based screens, such as eliminating tobacco companies.

Answer: (D)

Combining screens and tilts lets you shape an index by both narrowing the eligible universe and biasing weights toward desirable ESG characteristics. Screens impose constraints or exclusions on holdings, such as removing tobacco companies or other industries you don’t want in the index. Tilts adjust the weights to favor securities with higher ESG scores, overweighting those with better ESG profiles and underweighting those with poorer scores. Using both together means you first exclude certain companies and then overweight the remaining ones based on ESG attributes, achieving an ESG tilt within the restricted set. This is why an approach that applies limited, values-based screens (to remove specific types of companies) while tilting toward ESG characteristics best captures the intended method.

Combining screens and tilts lets you shape an index by both narrowing the eligible universe and biasing weights toward desirable ESG characteristics. Screens impose constraints or exclusions on holdings, such as removing tobacco companies or other industries you don’t want in the index. Tilts adjust the weights to favor securities with higher ESG scores, overweighting those with better ESG profiles and underweighting those with poorer scores. Using both together means you first exclude certain companies and then overweight the remaining ones based on ESG attributes, achieving an ESG tilt within the restricted set. This is why an approach that applies limited, values-based screens (to remove specific types of companies) while tilting toward ESG characteristics best captures the intended method.