Tradable Risk Factors for Institutional and Retail Investors

100 Pages Posted: 24 Sep 2020 Last revised: 9 Feb 2024

See all articles by Andreas Johansson

Andreas Johansson

Lund University

Riccardo Sabbatucci

Stockholm School of Economics; Swedish House of Finance

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: May 5, 2020

Abstract

We construct tradable risk factors using combinations of large and liquid mutual funds (long leg) and ETFs (long and short legs), based on their holdings, for both retail and institutional investors. Exploiting a novel dataset, our tradable factors take into account ETF shorting costs. Assessing the performance of our tradable factors against standard “on-paper” factors, we uncover an implementation shortfall of 2%-4% annually. Shorting fees and transaction costs contribute to 58% of the performance differential between tradable and “on-paper” factors, assigning a non-trivial role to the opportunity cost of not trading the exact “on-paper” portfolio.

Keywords: Smart beta, factor investing, tradable factors, shorting costs, borrowing fees

JEL Classification: G11, G12

Suggested Citation

Johansson, Andreas and Sabbatucci, Riccardo and Tamoni, Andrea, Tradable Risk Factors for Institutional and Retail Investors (May 5, 2020). Swedish House of Finance Research Paper No. 20-21, Available at SSRN: https://ssrn.com/abstract=3594064 or http://dx.doi.org/10.2139/ssrn.3594064

Andreas Johansson

Lund University ( email )

Lund University School of Economics and Management
P.O. Box 7080
Lund, 22007
Sweden
+46 (0)46 222 00 00 (Phone)

HOME PAGE: http://lusem.lu.se

Riccardo Sabbatucci (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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