Tax-Managed Factor Strategies
Forthcoming, Financial Analysts Journal
20 Pages Posted: 14 Jan 2019
Date Written: January 4, 2019
We examine the tax efficiency of an indexing strategy and six factor tilts. Between June 1995 and March 2018, average value added by tax management exceeded 1.4% per year at a 10- year horizon for all the strategies we considered. Tax-managed factor tilts that are beta 1 to the market generated average tax alpha between 1.6% and 1.9% per year, while average tax alpha for the tax-managed indexing strategy was 2.3% per year. These remarkable results depend on the availability of short-term capital gains to offset. To a great extent, they can be attributed to loss harvesting and the tax rate differential.
Keywords: tax-managed investment, loss harvesting, tax alpha, rate differential, factor tilt, value, momentum, size, quality, minimum variance
JEL Classification: G11, G18, H24
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