Portfolio turnover.
In plain English
Portfolio turnover measures trading activity by comparing the lesser of purchases or sales during the year with the fund's average assets, so 100 percent means the equivalent of the entire portfolio changed hands. Turnover is disclosed in a fund's prospectus and annual report. High turnover brings costs that do not appear in the expense ratio: commissions, bid-ask spreads, and market impact, all of which come out of return before it is reported. In a taxable account it also generates realized capital gains that get distributed to shareholders, creating a tax bill in a year the investor may not have sold anything. Index funds usually show low turnover because holdings change only when the index does.
01Why it matters
Turnover is a hidden cost line, since the trading it describes is paid for out of the fund's return and never shows up in the advertised expense ratio.
02The math, step by step
A fund reports 120 percent turnover. If round-trip trading costs average 0.30 percent of the amount traded, the drag is roughly 1.2 times 0.30, or 0.36 percent a year. On 100,000 that is 360 annually, and compounded over 30 years against a 7 percent gross return it is a difference of roughly 73,000 in ending balance.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Turnover is not the expense ratio. The expense ratio covers management and administration and is deducted openly. Trading costs from turnover are paid inside the fund and reduce the return before it is published, so a low expense ratio and heavy turnover can still be an expensive fund.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
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