Tradable Risk Factors for Institutional and Retail Investors

Andreas Johansson, Riccardo Sabbatucci and Andrea Tamoni

Review of Finance, 2025, vol. 29, issue 1, 103-139

Abstract: We construct tradable risk factors using combinations of large and liquid mutual funds (long leg) and ETFs (exchange-traded funds) (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 percent annually. Shorting fees and transaction costs contribute to 58 percent 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 fees; borrowing costs (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2025
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