Portfolio turnover ratio

The portfolio turnover ratio measures how much of a fund's holdings are bought and sold over the course of a year, expressed as a percentage of the fund's average assets. A turnover ratio of 100% roughly means the fund replaced the equivalent of its entire portfolio once over the course of the year, while a ratio of 20% suggests a much more patient approach, with only a fifth of the portfolio turning over on average.

The formula is:

A low turnover ratio generally points to a buy and hold style manager who lets winning positions run and trades infrequently, common among index funds and long-term value oriented strategies. A high turnover ratio points to a manager trading more actively, moving in and out of positions more often, which is common in momentum driven or tactical strategies.

Turnover matters to investors for two practical reasons beyond just describing a manager's style. Higher turnover generally means higher trading costs, which quietly reduce fund returns even though they usually do not appear directly in the expense ratio, and higher turnover inside a taxable account tends to generate more frequent and larger capital gains distributions, since more securities are being sold at a gain along the way. An investor holding a high turnover fund in a taxable brokerage account should expect a larger annual tax bill than an investor holding a similar but lower turnover fund.