Understanding Fund Annual Turnover: A Comprehensive Guide

The annual turnover of a fund measures the percentage rate by which that fund replaces its investment holdings each year. All funds have some inflow of profits and equity and some outflow of funds due to trading. Very active funds will replace their holdings at a high percentage. Inactive funds will have a lower annual turnover.

Using Annual Turnover

If you are looking for a less active fund, you should aim for one with low annual turnover. This shows the fund manager has a more passive investment style. Passively managed funds have a lower cost for management and transaction fees to the investor. Evidence shows passively managed funds can perform very highly despite the hands-off approach.

Annual Turnover Comparisons

When you are comparing two funds based on this metric, be sure you are using comparable periods. There are certain times when the market dictates action, even for a passive fund. During this period, such as in a market crash, all funds will have a higher turnover. Therefore, it is important to compare quarter to quarter or year to year for two funds operating at one given time. You may also compare a fund's turnover to its turnover from last year to see if it is trending in a certain direction.