What is 'Annual Turnover'

Annual turnover is the percentage rate at which a mutual fund or an exchange-traded fund (ETF) replaces its investment holdings on an annual basis. Turnover is meant to measure either inflows and outflows compared to assets under management (AUM) and report on the level of trading activity in the fund.

BREAKING DOWN 'Annual Turnover'

Annual turnover is a good way to inspect the average time horizon of a fund. Higher turnover levels generally add to the expense ratio of a fund and increase capital gains distributions. Benchmark funds such as the S&P 500-matching SPDRs have very low turnover, usually less than 10% per year. On the other end of the spectrum, some funds employ active trading strategies that push annual turnover past 100% annually.

High turnover rates apply to actively managed funds, while passive portfolios such as an index fund have very low turnover ratios. To calculate the turnover ratio for a given fund, the total amount of assets purchased or sold during the year must be obtained. If a fund holds $100 million in AUM and $75 million of those assets are liquidated at some point during the measurement period, then assets sold/AUM = turnover rate, or 75%. It is important to note a fund turning over at 100% annually has not necessarily liquidated all positions with which it began the year; rather, the complete turnover accounts for frequent trading in and out of issues and the fact sales of securities equal total AUM for the year. Using the same formula, the turnover rate is also measured by the amount of securities bought in the measurement period.

Actively Managed Funds

Growth funds rely on trading strategies and stock selection from seasoned professional managers who set their sights on outperforming the index against which the portfolio benchmarks. Owning large equity positions is less about a commitment to corporate governance than it is a means to positive shareholder results. Managers who consistently beat the indices stay on the job and attract significant capital inflows. While the passive versus active management argument persists, high volume approaches realize moderate success. Consider the Alger Capital Appreciation Fund, a four-star rated Morningstar fund with a frenetic 141% turnover rate that outperformed the S&P 500 Index in six of the last 10 years through 2015.

Passively Managed Funds

Index funds such as the Fidelity Spartan 500 Index Fund adopt a buy-and-hold strategy that owns positions in equities as long as they remain components of the benchmark. Maintaining a perfect positive correlation to the index, the portfolio turns over at a rate of 5%. Trading activity is limited to purchasing securities from inflows and infrequently selling issues removed from the index. As indices historically outpace managed funds greater than 60% of the time, a high turnover rate is never an indicator of fund quality or performance. The Fidelity Spartan 500 Index Fund, after expenses, returned 9 basis points less than the 1.4% mark of S&P 500 in 2015 with dividends reinvested.

RELATED TERMS
  1. Turnover Ratio

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

    A measure of how frequently assets within a fund are bought and ...
  3. Overall Turnover

    A synonym for total revenues, commonly used in Europe and Asia. ...
  4. Turnover

    1. In accounting, the number of times an asset is replaced during ...
  5. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
  6. Asset Turnover Ratio

    The amount of sales generated for every dollar's worth of assets ...
Related Articles
  1. 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.
  2. 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.
  3. Investing

    Turnover Ratios Weak Indicator Of Fund Quality

    This indicator is not as important as some investors might think.
  4. 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 ...
  5. 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.
  6. Investing

    Mutual Funds That Reduce Your Taxes

    It may be best to opt for ETFs over mutual funds, which allow wiser investors to reduce their tax obligations.
  7. Investing

    Will A New Fund Manager Cost You?

    Learn how a change in leadership could mean more taxes for you.
  8. Investing

    3 Index Funds with the Lowest Expense Ratios

    Read detailed information about index mutual funds with some of the lowest expense ratios in their categories, and learn about their pros and cons.
  9. Trading

    Seven Emerging Currencies Challenging The Forex Hierarchy

    While the top-seven currencies follow a somewhat stable hierarchy, second-tier currencies can be all over the map.
  10. 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 ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What does a high turnover ratio signify for an investment fund? (KNOW)

    Find out more about the turnover ratio, what the turnover ratio measures and what a high turnover ratio indicates about an ... Read Answer >>
  5. 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 >>
  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 >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center