Annual Turnover - Measure of Mutual Fund's Transactions

Annual Turnover

Annual turnover is a term used when describing the amount of securities removed from a mutual funds holdings during a 12-month period.  Tracking a funds annual turnover is a good measure of the funds ability to stick with a long-term trading approach.  Another reason a potential investor will want to track the annual turnover is because the higher the annual turnover, the higher the expense ratio for the fund.

Annual Turnover Formula

The annual turnover is calculated by taking the total of all the transactions, dividing it by 2 and then dividing that number by the mutuals funds total holdings.  For example, if Mutual Fund A holds 3 stocks and sells one of its holdings in mid-June and now only holds 2 positions.  The Annual Turnover would be calculated as follows:

1/3 (running 12-month total of mutual fund holdings) = 33% annual turnover

As you can see the annual turnover only covers the shift in positions and not the dollar value of the holdings.

Standard Annual Turnover Rates

If an investor is looking for a fund that maintains long-term investments, it is a good idea to keep the annual turnover rate below 10%.  However, if an investor is looking for a more aggressive investment style, it is better to look for funds with an annual turnover rate of 75% or more.  While the expenses are higher for these types of mutual funds, the investor hopes that the higher rate of return will outweigh the additional trading costs.