Transaction Costs of Factor Investing Strategies

Financial Analysts Journal, Spring 2019, Forthcoming

40 Pages Posted: 22 Apr 2019

See all articles by Feifei Li

Feifei Li

Research Affiliates, LLC

Tzee-man Chow

Research Affiliates, LLC

Alex Pickard

Research Affiliates, LLC

Yadwinder Garg

Bank of Montreal - BMO Global Asset Management

Date Written: November 30, 2018

Abstract

Although hidden, implicit market impact costs of factor investing strategies may substantially erode the strategies' expected excess returns. The authors explain these market impacts costs and model them using rebalancing data of a suite of large and longstanding factor investing indices. They introduce a framework to assess the costs of rebalancing activities, and attribute these costs to characteristics such as rate of turnover and the concentration of turnover, which intuitively describe the strategies' demands on liquidity. The authors evaluate a number of popular factor-investing strategy implementations and identify how index construction methods, when thoughtfully designed, can reduce market impact costs.

Keywords: factor investing, smart beta, transactions costs, implementation costs, implicit market impact cost, market impact cost model, capacity

JEL Classification: G00

Suggested Citation

Li, Feifei and Chow, Tzee-man and Pickard, Alex and Garg, Yadwinder, Transaction Costs of Factor Investing Strategies (November 30, 2018). Financial Analysts Journal, Spring 2019, Forthcoming . Available at SSRN: https://ssrn.com/abstract=3359947

Feifei Li

Research Affiliates, LLC ( email )

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Tzee-man Chow (Contact Author)

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States
949-325-8754 (Phone)

Alex Pickard

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

Yadwinder Garg

Bank of Montreal - BMO Global Asset Management ( email )

115 S. LaSalle, 11th Floor
Chicago, IL 60603
United States

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