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How Tax Efficient are Equity Styles?

Ronen Israel

Interdisciplinary Center, Herzliyah

Tobias J. Moskowitz

University of Chicago - Booth School of Business

July 1, 2011

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

We examine the after-tax performance, tax exposure, and tax efficiency of size, value, growth, and momentum equity styles. On an after-tax basis, value and momentum outperform, and growth underperforms, the market. Decomposing the tax exposure of each style, we find that turnover is a misleading indicator of tax efficiency. Momentum, despite having more than five times the turnover of value, has the same tax rate as value, because momentum generates substantial short-term losses while value has high dividend income. In addition, tax optimization through capital gain and loss realization incurs less tracking error than avoiding dividend income. Hence, momentum, whose tax exposure is primarily driven by capital gains, while value and growth's taxes are more sensitive to dividends, is the only style that allows significant tax reduction without incurring significant style drift. The differential effects of taxes across equity styles are magnified within a broader asset allocation framework and in down markets.

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Date posted: June 23, 2012  

Suggested Citation

Israel, Ronen and Moskowitz, Tobias J., How Tax Efficient are Equity Styles? (July 1, 2011). 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
Interdisciplinary Center, Herzliyah ( email )
P.O. Box 167
Herzliya, 46150
972-9-9527306 (Phone)
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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