PT  - JOURNAL ARTICLE
AU  - Shaojun Zhang
TI  - Toward Tax-Efficient Low-Volatility Investing
AID  - 10.3905/jpm.2021.48.2.198
DP  - 2021 Dec 31
TA  - The Journal of Portfolio Management
PG  - 198--207
VI  - 48
IP  - 2
4099  - https://pm-research.com/content/48/2/198.short
4100  - https://pm-research.com/content/48/2/198.full
AB  - This article reevaluates low-volatility investing strategies—in particular, their tax efficiency. Low-volatility strategies intend to help investors achieve market-like equity returns, but with less risk than the broader market. Among the low-volatility strategies, those with lower volatility carry lower returns but incur higher turnover and tax burdens. Explicit tax management can greatly improve the strategy’s performance. Tax management, however, is no easy task in practice due to burdensome record-keeping. This article proposes two sets of tax-managed low-volatility investing strategies that require different amounts of record-keeping. Both strategies can significantly improve the after-tax strategy returns while maintaining the compelling risk and pre-tax return profile. Specifically, accounting for net taxable gains alone can harvest most tax alphas, and accounting for the timing of tax lots accurately can further improve the strategy’s performance.