Smart Rebalancing
26 Pages Posted: 11 Mar 2023
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: Suggested Citation