Turnover Ratio in Investing: Definition, Application, and Real-World Examples

A turnover ratio, or turnover rate in investing, is the percentage of a mutual fund or portfolio’s holdings that have been replaced in the course of one year. Some funds hold their equity positions for less than 12 months, meaning their turnover ratios exceed 100%. However, this ratio reflects the proportion of stocks that have changed within a year.

The turnover ratio varies by the type of mutual fund, its investment objective, and the portfolio manager’s investing style. For example, a stock market index fund will have a low turnover rate since it duplicates a particular index and replaces holdings only when the index changes. An actively traded mutual fund may have a high turnover rate, depending on how aggressively its manager buys and sells holdings in search of better returns.

Actively managed mutual funds with a low turnover ratio reflect a buy-and-hold investment strategy. Funds with high turnover ratios indicate an attempt to profit by a market-timing approach. An aggressive small-cap growth stock fund will generally experience higher turnover than a large-cap value stock fund.

In the mutual fund industry, turnover ratio is the percentage of the fund’s holdings that have been replaced in the course of one year. In business, turnover ratio is a measurement of efficiency, indicating the length of time it takes a business to sell the goods that it has spent money up front to acquire. In a company or industry, turnover ratio is the percentage of employees who leave within a year.

As a technical indicator, the turnover ratio itself has no intrinsic value. A high turnover ratio is not necessarily bad, nor is a low turnover ratio necessarily good. But investors should be aware of the consequences of turnover frequency. High turnover often results in increased costs for the fund due to the payment of spreads and commissions when buying and selling stocks. These increased costs are passed on to the investors and are reflected in the fund’s return overall.

Also, the more portfolio turnover in a fund, the more likely it is to generate short-term capital gains. These are profits on assets held for less than one year and are taxable at an investor’s ordinary-income rate, which is often higher than the capital gains rate.

A mutual fund’s turnover ratio shouldn’t be the sole basis for a decision to invest or divest in it. However, it can be useful to see how a particular fund’s turnover ratio compares with others of the same type of investment approach. The average turnover ratio for managed mutual funds is 75–115%. So, a conservative-minded equity investor might target funds with turnover ratios under 50%.

If a fund’s turnover ratio is significantly out of line with that of comparable funds, it might be something to note. For instance, if most funds in a particular sector have turnover ratios around 5%, but one fund posts 25% turnover in one year, the investor might want to investigate the reasons behind this discrepancy.

Turnover ratio alone shouldn’t be a deciding factor, but an abnormally high or low ratio among comparable funds is a reason to look harder at the fund’s performance over time to see just how successful its strategy has been.

The turnover ratio will be listed in the company’s prospectus for the mutual fund. It would be difficult for an investor to work it out since it would require knowing the sales price of every transaction made during the year and the average monthly net value of the fund over 12 months. The formula is as follows:

Total dollar value of all new portfolio assets (or value of portfolio assets sold, if that is the smaller), divided by monthly average net assets of the fund in dollars, times 100.

Let’s look at some real-world examples of turnover ratios:

The BNY Mellon Appreciation Fund from Fidelity (DGAGX) has a strong buy-and-hold strategy, with a turnover ratio of a bit over 9% as of year-end 2022.

Fidelity’s Rydex S&P Small-Cap 600 Pure Growth Fund (RYSGX) had an average turnover ratio of 707% at the end of March 2022.

Turnover ratio alone won’t help you determine whether a mutual fund is the right choice for you. It simply tells you what percentage of stocks and other assets in the fund have been replaced in the course of the year. However, when used in conjunction with other factors, it can be a valuable tool for assessing a fund’s overall strategy and performance.

Outside of the investing world, a turnover ratio in business is a measurement of a firm’s efficiency. It is calculated by dividing annual income by annual liability and can be applied to the cost of inventory or any other business cost. In business, a high turnover ratio is typically a positive sign, indicating that the business is selling its stock quickly.

A common use of a turnover ratio is to measure the proportion of a company’s employees who are replaced during a year. A low employee turnover rate indicates that people seldom leave the company, while a high turnover rate means they are leaving in large numbers. There’s no universally good or bad turnover rate; it varies by industry and company culture.

You can find the turnover ratio (or turnover rate) in the issuing company’s latest financial statement on the mutual fund. It’s an important piece of information to consider when evaluating a fund’s performance and investment suitability.