Smart Beta Made Smart: Synthetic Risk Factors for Institutional and Retail Investors

We construct tradable proxies of on-paper long-short risk factors using combinations of large and liquid mutual funds and ETFs, based on their holdings, for both retail and institutional investors. Using a novel proprietary dataset, we are able to account for the ETF shorting fees in constructing the short leg of the factors. In contrast with the recent literature, we find that investors are able to harvest the SMB and part of the HML risk premia, although MOM and RMW remain hard to replicate, with institutional investors outperforming retails. Our results have implications for the benchmarks that should be used to evaluate portfolio managers.