Smart Rebalancing

26 Pages Posted: 11 Mar 2023

See all articles by Robert D. Arnott

Robert D. Arnott

Research Affiliates, LLC

Feifei Li

Research Affiliates, LLC

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: March 7, 2023

Abstract

Implementation shortfall, whether from trading costs, discontinuous trading, or other frictions,
erodes the performance of any investment strategy. These frictions, along with asset management
fees, are the main sources of the sometimes-vast gap between live results and paper portfolio
performance. Smart beta and factor strategies are not exceptions. In this paper, we investigate
how smart rebalancing methods can capture most of the factor premia for a long-only paper
portfolio, while cutting turnover and trading costs relative to a fully rebalanced portfolio. We
demonstrate the efficacy of prioritizing trades to the stocks with the most attractive signals and of
focusing portfolio turnover on the trades that offer the highest potential performance impact.

Keywords: Smart Beta, Rebalancing, Factor Investing

JEL Classification: G1, G11, G23, D23, E3,

Suggested Citation

Arnott, Robert D. and Li, Feifei and Linnainmaa, Juhani T., Smart Rebalancing (March 7, 2023). Available at SSRN: https://ssrn.com/abstract=4381611 or http://dx.doi.org/10.2139/ssrn.4381611

Robert D. Arnott

Research Affiliates, LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
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949-325-8700 (Phone)
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HOME PAGE: http://www.researchaffiliates.com

Feifei Li (Contact Author)

Research Affiliates, LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8753 (Phone)
949-325-8953 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.tuck.dartmouth.edu/faculty/faculty-directory/juhani-linnainmaa

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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