Tax Management of Factor Based Portfolios
The risk adjusted returns of factor strategies can look quite attractive. However, the turnover associated with them can significantly reduce their after tax excess returns. In this article, the authors report the results of their after tax study of these strategies. They find that material pre tax excess return can be gained through exposure to popular factors up to 2.4% net of management fees. From an after tax perspective, they find that taxes can erode much of this return unless a systematic tax management process is applied.
The Journal of Index Investing