How much of a factor premium does trading eat?
A published factor return is a paper return: it subtracts nothing for the trades that produce it. A fund earns the premium net of the ETF course's cost waterfall, and for the factors that trade most, the waterfall can be most of the premium. This lesson sizes it.
Turnover is the multiplier
A cost line is a rate times an amount, and turnover is the amount. Measured on 2026-09-04 the funds' own records reported annual holdings turnover of 111% for the momentum fund MTUM.US, 58% for the quality fund QUAL.US, 23% for the low-volatility fund USMV.US, and 10% to 15% for the value funds VTV.US and IWD.US. The market fund SPY.US reported 2%.
Now a rate. Trading a large US share costs a few hundredths of a percent in spread and a few more in price impact for a fund of any size; call the round trip 0.10% for the largest names and 0.30% for small ones. At 111% turnover that is 0.11% to 0.33% a year on the momentum fund before its 0.15% fee — comparable to the fee, and invisible in the fee. At 2% turnover the market fund's trading cost rounds to nothing.
The premium it is measured against
Momentum's paper premium in the long US record is the largest of the five factors, several percent a year long-short. The long-only fund earns a fraction of that, and the fraction has to clear fee plus trading plus one more line before it is a premium at all.
The third line: tax
In a taxable account, turnover realises gains. A value fund that re-sorts annually sells the names that rose out of the cheap group — by construction its winners — and a momentum fund sells its winners every six months. The US ETF wrapper's in-kind redemption removes most of the distributable gain. A mutual fund, which sells to meet redemptions and distributes what it realises, can turn a 111% turnover into a tax bill every year; for a fund domiciled elsewhere the answer depends on the domicile, on whether the share class distributes or accumulates, and on the holder's own tax rules. The domicile lesson of the ETF course is where that arithmetic lives.
What survives
Put the three lines together for a momentum fund: fee 0.15%, trading 0.1% to 0.3%, tax where it applies. Against a long-only premium that has run perhaps 1% to 2% a year over the market in good decades and negative in bad ones, the costs are a third to a half of the good decades and all of the bad. Value, sorted annually at 10% turnover, keeps nearly all of what it earns. Low volatility, at 23%, most. The ranking of factors by paper return and by net return are not the same ranking — and the net one is the only one a holder receives.
Measured on the funds themselves over ten years to 3 September 2026: MTUM.US returned about 332% against 316% for SPY.US, sixteen points ahead after all costs; QUAL.US about 280%, behind; USMV.US about 164%, well behind on return and ahead only on the ride. One decade is one draw, and the drawdowns lesson is the reminder.
In the data
Two of the three inputs are on every fund's record: the turnover, which is the multiplier, and the fee. The momentum fund and a value fund:
The first record shows both as percentages; the second as fractions, so 0.1 is 10%. The third input, the spread paid on each trade, is on no fund record: the average daily volume of the names a fund holds is a proxy, since thin volume usually means a wide spread, and some funds report their own median bid-ask spread. No published figure states a fund's trading cost; you build it from those three.
Try it now
From the two records above, compute a total cost line for both funds at a 0.15% round trip. Write both totals down beside the premium each factor is supposed to earn.
The market both are trying to beat, net:
Measure 2 September 2016 to 3 September 2026. Then decide whether sixteen points over ten years, the momentum fund's measured margin, is more than its costs — and how much of it you would expect to see in the next ten.