Turnover Ratio
Percentage of fund holdings sold and replaced each year. 100% = entire portfolio traded. High turnover = higher taxes and costs.
What You Need to Know
Turnover ratio measures how frequently a fund trades its holdings. 50% turnover means half the portfolio was sold and replaced in a year. 100% turnover means the entire portfolio turned over.
Why it matters:
- Trading costs: Each trade has bid-ask spreads and potential commissions that reduce returns
- Tax efficiency: Selling creates taxable capital gains for you
- Manager skill: High turnover often indicates market timing attempts that usually fail
Index funds: 2-10% turnover (buy and hold) Actively managed funds: 30-100%+ turnover (frequent trading)
Example: Fund with 80% turnover in taxable account generates capital gains taxes yearly. Index fund with 5% turnover defers taxes for decades—compounding advantage.
Look for turnover under 30% unless you have specific reasons to accept higher (tactical funds). Lower turnover = more tax-efficient, lower costs, less market timing.
Sources & References
This information is sourced from authoritative government and academic institutions:
- sec.gov
https://www.sec.gov/reportspubs/investor-publications/investorpubsinwsmfhtm.html
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Related Terms in Investment
12b-1 Fee
Hidden mutual fund fee (0.25-1% annually) for marketing and distribution. Comes out of your returns. Avoid funds with high 12b-1 fees.
AUM (Assets Under Management)
Total market value of investments managed by an advisor or fund. Used to calculate 1% annual advisor fees—$500K AUM = $5K/year.
Alpha
Excess return above benchmark. Positive alpha = beat the market. Most actively managed funds have negative alpha after fees.
Bear Market
20%+ sustained market decline from recent peak. Characterized by fear, pessimism, and falling prices. Buying opportunity for long-term investors.
Beta
Volatility compared to market. Beta of 1.0 = moves with market. Beta of 1.5 = 50% more volatile. Measures risk, not return.
Bull Market
20%+ sustained market rise from recent low. Characterized by optimism, economic growth, and rising prices. Opposite of bear market.