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Practical Applications Summary
As the smart beta market grows, investors are wondering how big these strategies can get before they start losing efficacy. In Capacity of Smart Beta Strategies from a Transaction Cost Perspective, published in the Winter 2017 issue of the Journal of Index Investing, Ronald Ratcliffe, Paolo Miranda, and Andrew Ang set out to tackle one dimension of this debate. Using a transaction cost model that was developed by the BlackRock team for daily use, the article examines the “capacity” of momentum, quality, size, value, minimum volatility, and multifactor strategies. Capacity is defined as the hypothetical breakeven AUM at which the turnover transaction costs of an ETF would exactly offset the historically observed style premium.
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