How Tax Efficient are Equity Styles?

71 Pages Posted: 23 Jun 2012 Last revised: 15 May 2014

See all articles by Ronen Israel

Ronen Israel

AQR Capital Management, LLC

Tobias J. Moskowitz

Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

Date Written: October 1, 2012


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.

Suggested Citation

Israel, Ronen and Moskowitz, Tobias J. 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: or

Ronen Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Tobias J. Moskowitz (Contact Author)

Yale University, Yale SOM ( email )

493 College St
New Haven, CT CT 06520
United States


AQR Capital ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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