Turnover Ratio

Turnover Ratio: Definition and Why It Matters

The turnover ratio (or turnover rate) measures how frequently a fund’s holdings are bought and sold over a one-year period. It’s expressed as a percentage of the portfolio’s assets that have been replaced during that year. For example, a 25% turnover ratio means one-quarter of the portfolio’s holdings changed hands during the year.

A turnover ratio can exceed 100% when a fund cycles through holdings faster than a single year — that does not necessarily mean every holding was replaced.

How It’s Calculated

Turnover Ratio = (Smaller of total purchases or total sales of portfolio assets during the year ÷ average monthly net assets of the fund) × 100

Fund prospectuses or annual reports typically list the turnover ratio, since computing it precisely requires detailed transaction and asset-value data.

What the Turnover Ratio Reveals

• Investment style: Low turnover often indicates a buy-and-hold strategy (common in index funds). High turnover often indicates active trading and a market-timing approach.
• Costs: Higher turnover typically raises trading costs (commissions, bid-ask spreads) that reduce net returns and are ultimately borne by investors.
• Taxes: Greater turnover increases the likelihood of short-term capital gains (assets held less than one year), which are taxed at ordinary income rates for taxable accounts.

A high turnover ratio is not inherently good or bad — it must be evaluated alongside fund performance, fees, and objectives.

Typical Ranges and How to Read Them

• Low turnover: ~20–30%
• Moderate: ~50% (used by some investors as a balance between activity and stability)
• High: 100% or more

When evaluating a fund, compare its turnover ratio to peers with the same investment objective. Large deviations from category norms warrant questions: Did management change? Has the strategy shifted? Is higher activity producing superior returns after costs and taxes?

Examples

• Low-turnover example: A buy-and-hold large-cap fund might report turnover in the low teens, reflecting infrequent trading.
• High-turnover example: Some aggressive small-cap or sector funds can show turnover in the hundreds of percent, indicating frequent in-and-out trading.

These contrasts illustrate how turnover reflects strategy, not quality.

Explain Like I’m Five

Turnover ratio tells you how often a fund buys and sells what it owns. If a fund trades a lot, you’ll likely pay more fees and might face higher taxes — those extra costs can lower your take-home returns.

Turnover Ratio in Business and HR (Other Uses)

• Inventory/business: Turnover can mean how quickly a company sells its inventory or uses assets. Higher inventory turnover is generally positive because it indicates efficient sales.
• Employee turnover: The percentage of employees who leave a company in a year. High or low is context-dependent — some industries naturally have higher turnover, while in others high turnover may signal problems.

Where to Find a Fund’s Turnover Ratio

Look in the fund’s prospectus, annual report, or the “fund facts” section on the fund company’s website. Financial data services and fund providers (e.g., Vanguard, Fidelity, Morningstar) also publish turnover figures.

Bottom Line

The turnover ratio is a useful descriptive metric that reveals how actively a fund is managed. It should not be the sole basis for investment decisions but is a helpful signal when paired with performance, fees, tax considerations, and whether the fund’s activity aligns with its stated strategy.