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Tradable Risk Factors for Institutional and Retail Investors

Author

Listed:
  • Andreas Johansson
  • Riccardo Sabbatucci
  • Andrea Tamoni

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.

Suggested Citation

  • Andreas Johansson & Riccardo Sabbatucci & Andrea Tamoni, 2025. "Tradable Risk Factors for Institutional and Retail Investors," Review of Finance, European Finance Association, vol. 29(1), pages 103-139.
    • Handle: RePEc:oup:revfin:v:29:y:2025:i:1:p:103-139.
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    File URL: http://hdl.handle.net/10.1093/rof/rfae034
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    More about this item

    Keywords

    smart beta; factor investing; tradable factors; shorting fees; borrowing costs;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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