A:

If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. A high turnover ratio signifies the investment fund is actively managed. To match his investment strategy, an investor should consider a fund's turnover ratio before investing in the fund.

Explaining the Significance of a High Turnover Ratio

The turnover ratio is a measurement used to determine an investment fund's trading activity and is calculated by dividing the value of all of the fund's transactions by two. The resulting value is then divided by the investment fund's total holdings. An investment fund's turnover ratio indicates the percentage of the fund's holdings that have changed on an annual basis.

If a fund's turnover ratio is greater than 100%, the high turnover ratio signifies the fund manager is actively managing the fund and the investment strategy involves a considerable amount of buying and selling of securities. Consequently, if an investment fund has a high turnover ratio, it may indicate the fund's fees are relatively high for its category due to the transaction fees.

For example, the Direxion All Cap Insider Sentiment ETF (KNOW) is an actively managed exchange-traded fund (ETF) that seeks to track the Sabrient Multi-Cap Insider/Analyst Quant-Weighted Index. As of Oct. 31, 2014, it had a turnover ratio of 835%, which points to the fund actively trading the securities in the fund. The turnover ratio indicates the fund's holdings have changed over eight times in a one-year period. The high turnover ratio signifies the investment fund has relatively high management fees. As of July 19, 2015, the net expense ratio of KNOW is 0.65%, while its category average is 0.32%.

RELATED FAQS
  1. What is considered a good turnover ratio for a mutual fund?

    Understand what the concept of turnover ratio represents in relation to a mutual fund, and how an investor can evaluate a ... Read Answer >>
  2. How can a mutual fund raise or lower its turnover ratio?

    Find out how a fund manager can raise or lower a fund's turnover ratio, including how to interpret this metric and what it ... Read Answer >>
  3. What is a good turnover ratio for a mutual fund?

    Learn about mutual fund turnover ratios and why the ideal ratio may differ based on the type of mutual fund and your investment ... Read Answer >>
  4. How should I use portfolio turnover to evaluate a mutual fund?

    Learn about the turnover rate for mutual funds, and understand the effect higher turnover may have on fund performance and ... Read Answer >>
  5. What is the difference between accounts payable turnover ratio and accounts receivables ...

    Learn the difference between the accounts payable turnover ratio and the accounts receivable turnover ratio. Understand what ... Read Answer >>
  6. What are some examples of efficiency ratios used in measuring businesses?

    Learn about some of the most common efficiency ratios that market analysts and investors use in the process of evaluating ... Read Answer >>
Related Articles
  1. Investing

    How to Calculate a Turnover Ratio

    A turnover ratio measures a mutual fund’s level of trading activity in a given time period, usually a year.
  2. Financial Advisor

    What Is Portfolio Turnover?

    Portfolio turnover measures a fund’s percentage of assets that are bought and sold by its manager over a year.
  3. Managing Wealth

    Understanding Turnover

    Turnover has a number of different, but related, meanings depending on the context in which it is used. Generally, it means the number of times an item is replaced with a new or similar version ...
  4. Investing

    Turnover Ratios Weak Indicator Of Fund Quality

    This indicator is not as important as some investors might think.
  5. Investing

    Understanding Activity Ratios

    Activity ratios measure how effectively a business uses its assets.
  6. Investing

    Receivables Turnover Ratio

    The receivables turnover ratio is a measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. Learn more about it here.
  7. Investing

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  8. Investing

    Reading The Inventory Turnover

    Inventory turnover is a ratio that shows how quickly a company uses up its supply of goods over a given time frame. Inventory turnover may be calculated as the market value of sales divided by ...
  9. Investing

    AR & Inventory Turnover Is Key For These Sectors

    Accounts receivable and inventory turnover are two important ratios in the current asset category. We will also discuss the key industries that benefit from a thorough understanding of these ...
  10. Investing

    Mutual Fund Due Diligence: 5 Things to Look Out for in Quarterly Reports

    Learn about five important items found in a mutual fund's annual and quarterly reports and why investors should pay attention to changes in these items.
RELATED TERMS
  1. Turnover Ratio

    The percentage of a mutual fund or other investment vehicle's ...
  2. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
  3. Annual Turnover

    The percentage rate at which a mutual fund or exchange-traded ...
  4. Asset Turnover Ratio

    The amount of sales generated for every dollar's worth of assets ...
  5. Working Capital Turnover

    A measurement comparing the depletion of working capital to the ...
  6. Overall Turnover

    A synonym for total revenues, commonly used in Europe and Asia. ...
Trading Center