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How Tax Efficient are Equity Styles?

Ronen Israel

AQR Capital Management, LLC

Tobias J. Moskowitz

University of Chicago - Booth School of Business

October 1, 2012

Chicago Booth Research Paper No. 12-20
Fama-Miller Working Paper

We examine the after-tax returns and tax efficiency of Size, Value, Growth, and Momentum equity styles. Examining portfolios commonly used in the literature and practice we find that Value and Momentum have the highest tax exposures, but continue to outperform the market on an after-tax basis. Momentum and Value face similar tax rates, despite Momentum having five times the turnover of Value, because Value is exposed to high dividend income, while Momentum’s exposure is primarily capital gains. We then construct tax optimized portfolios to assess how taxes can be improved within each style. We find that managing capital gains incurs less tracking error than avoiding dividend income. Hence, optimal tax trading improves capital gain-heavy styles such as Momentum without incurring significant style drift, while income-heavy styles such as Value are more difficult to improve. Tax optimization, therefore, further increases the after-tax outperformance of Momentum relative to Value and Growth.

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Date posted: June 23, 2012 ; Last revised: May 15, 2014

Suggested Citation

Israel, Ronen and Moskowitz, Tobias J., How Tax Efficient are Equity Styles? (October 1, 2012). Chicago Booth Research Paper No. 12-20; Fama-Miller Working Paper. Available at SSRN: http://ssrn.com/abstract=2089459 or http://dx.doi.org/10.2139/ssrn.2089459

Contact Information

Ronen Israel
AQR Capital Management, LLC ( email )
Greenwich, CT
United States
Tobias J. Moskowitz (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-2757 (Phone)
773-702-0458 (Fax)
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