What Is a Turnover Ratio?

What Is a Turnover Ratio?

In investment, a turnover ratio indicates the rate at which a fund's holdings are bought and sold. Let me explain it directly: the turnover ratio or turnover rate in investing is the percentage of a mutual fund or other portfolio holdings that have been replaced over one year.

You might see some funds holding their equity positions for less than 12 months, pushing their turnover ratios above 100%. That doesn't mean every holding has been swapped out; it just shows the proportion of stocks that changed in that year.

Formula and Calculation of the Turnover Ratio

You'll find the turnover ratio listed in the company's prospectus for the mutual fund. It's tough for you as an investor to calculate it yourself, since it requires knowing the sales price of every transaction over the year and the average monthly net value of the fund.

Here's the formula: Turnover Ratio = (Total dollar value of all new portfolio assets (or value of portfolio assets sold, if that's smaller) / monthly average net assets of the fund in dollars) x 100.

What the Turnover Ratio Can Tell You

The turnover ratio differs based on the mutual fund type, its goals, and how the manager invests. For instance, a stock market index fund keeps a low turnover rate because it mirrors an index and only changes holdings when the index does. An actively managed fund might have a high rate if the manager is aggressively buying and selling for better returns.

If a fund has a low turnover, it suggests a buy-and-hold strategy. High turnover points to market-timing efforts. Expect higher turnover in an aggressive small-cap growth fund compared to a large-cap value one.

Remember, in the mutual fund world, it's the percentage of holdings replaced in a year. In business, it measures efficiency, like how quickly goods are sold after acquisition. For companies, it's the percentage of employees leaving within a year.

As a technical indicator, the turnover ratio itself doesn't hold special value. High isn't always bad, low isn't always good. But you need to know the consequences: high turnover means more costs from spreads and commissions, passed on to you. It also increases chances of short-term capital gains, taxed at your ordinary income rate, which is often higher than long-term rates.

A quick fact for you: a turnover ratio over 100% doesn't mean the fund replaced all its assets.

How to Read the Turnover Ratio

Don't base your entire decision to invest or sell on a mutual fund's turnover ratio alone. But it helps to compare it with similar funds using the same investment approach.

Typically, a low ratio is 20% to 30%, and high is 100% or more. If you're okay with some risk but want to stay conservative, aim for around 50%.

If a fund's ratio is way off from its peers, dig deeper. For example, if most in a sector are at 5% but one hits 25%, ask why—maybe a new manager or objective change? Or if peers are at 75% and one is 35%, is the management not active enough?

Turnover ratio isn't the decider, but an outlier among similar funds means you should check the fund's long-term performance to evaluate its strategy.

Examples of How to Use the Turnover Ratio

Take the BNY Mellon Appreciation Fund from Fidelity (DGAGX). It uses a strong buy-and-hold strategy in blue-chip companies with market caps over $5 billion, focusing on sustained profitability, strong balance sheets, global expansion, and above-average growth for capital preservation. As of Dec. 31, 2024, its turnover was 12.56%.

Then there's Fidelity's Rydex S&P Small-Cap 600 Pure Growth Fund (RYSGX), which invests in stocks within the S&P Small-Cap 600 Index range and derivatives. It puts at least 80% in fast-growing companies or emerging industries to match the index daily. By end of March 31, 2024, its turnover was 942%.

Explain Like I'm Five

The turnover ratio shows how often a mutual fund buys and sells assets for its investors. You calculate it by dividing the value of new assets by the average portfolio value for the year.

High turnover isn't automatically bad, but it leads to higher trading fees and short-term capital gains taxes that get passed to you. Most investors compare ratios among similar funds, along with other metrics.

What Is a Turnover Ratio in a Business?

Outside investing, the turnover ratio measures a firm's efficiency. You calculate it by dividing annual income by annual liability, applying it to inventory or other costs.

Unlike in investing, a high business turnover is usually good—it might mean stock sells out fast.

What Is a Turnover Ratio in a Company?

Commonly, it measures the proportion of employees replaced in a year. Low means few leave; high means many do.

No universal good or bad—some industries like tech have high turnover due to demand, while retail and hospitality do because of low pay and tough jobs.

How Do I Check the Turnover Ratio for My Mutual Fund?

Look in the issuing company's latest financial statement for the fund. For example, Vanguard lists its Vanguard Health Care Fund Investor Shares at 29% as of Jan. 31, 2024, under its 'Fundamental' list.

The Bottom Line

Turnover ratio alone won't tell you if a mutual fund is right for you. It just shows what percentage of assets were replaced in the year.

But it can be useful in your research. If similar funds have different ratios, investigate the performance. You might find better returns from the activity—or lack of it—or decide a rival fund is better.