Factor Tilts after Tax

Abstract

Tax-loss harvesting can improve the after-tax returns of factor-tilted strategies. In an empirical study of global and US strategies, we found that the tax alpha generated by harvesting losses augmented the return premium, or factor alpha, in six factor-tilted strategies.

- The annual tax alpha over a 15-year period ranged from 0.77% to 2.03% for global strategies, while the annual factor alpha ranged from 0.88% to 5.11%.

- Tax alpha was lower in strategies that were more constrained.

- Tax alpha was uncorrelated with the pre-tax factor alpha generated by factor-tilted strategies, which suggests a diversification benefit.

- Our results were qualitatively consistent over the most recent 10-, 15- and 20-year horizons.

Keywords: factor tilt, taxes, tax alpha, factor alpha, tax-loss harvesting, wealth management, ultra-high net worth investors

JEL Classification: G11, H24