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%.

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