Capacity of Smart Beta Strategies: A Transaction Cost Perspective

26 Pages Posted: 31 Oct 2016 Last revised: 9 Mar 2017

Ronald Ratcliffe

BlackRock, Inc

Paolo Miranda

BlackRock

Andrew Ang

BlackRock, Inc

Date Written: January 27, 2017

Abstract

Using a transaction cost model, and an assumption for the smart beta premium observed in data, we estimate the capacity of a particular implementation of momentum, quality, value, size, minimum volatility, and a multi-factor combination. For a given trading horizon, we can find the fund size where the transaction costs from flows into these strategies negate the smart beta premium. For a one-day trading horizon, momentum is the strategy with the smallest assets under management (AUM) capacity of $65 billion, and size is the largest with an AUM capacity of $5 trillion. At five days, momentum and size capacity rise to $320 billion and over $10 trillion, respectively.

Keywords: Capacity, smart beta, factor risk premium, transaction cost

JEL Classification: G11, G12

Suggested Citation

Ratcliffe, Ronald and Miranda, Paolo and Ang, Andrew, Capacity of Smart Beta Strategies: A Transaction Cost Perspective (January 27, 2017). Columbia Business School Research Paper No. 16-76. Available at SSRN: https://ssrn.com/abstract=2861324

Ronald Ratcliffe (Contact Author)

BlackRock, Inc ( email )

400 Howard St
San Francisco, CA 94105
United States

Paolo Miranda

BlackRock ( email )

Drapers Gardens
12 Throgmorton Ave
London, EC2N 2DL
United Kingdom

Andrew Ang

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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