Turnover and Mutual Fund Quality

Mutual fund turnover is calculated as the value of all transactions (buying, selling) divided by two, then divided by a fund's total holdings. Essentially, mutual fund turnover typically measures the replacement of holdings in a mutual fund and is commonly presented to investors as a percentage over a one year period. If a fund has 100% turnover, it may be construed that the fund replaces all of its holdings over a 12-month perio🤡d (it could also indicate the fund replaced 50% of its holdings twice within a year).

You may discover that your mutual fund turnover rate is much higher than you expected. According to Michael Laske, former research manager at Morningstar, the a♒verage turnover ratio for managed domestic ཧstock funds is 63% in 2019.

Keep in mind that analysts typically disagree on most issues. Nonetheless, it is important to consider the 澳洲幸运5官方开奖结果体彩网:turnover ratio before making any new investment decisions ♐or maintaining your current investments.

As is the case with most 澳洲幸运5官方开奖结果体彩网:technical indicators,💮 the value of turnover in your mutual fund is neither a litmus test for making an investment decision nor an indication of future results. As an investor, you should consider other factors in the context of your mutual fund's turnover rate before making any binding or🦹 irreversible decision.

Value Funds

In general, 澳洲幸运5官方开奖结果体彩网:value funds tend to have lower turnover rates, simply by dint of their 澳洲幸运5官方开奖结果体彩网:investment philosophy: find securities that are 澳洲幸运5官方开奖结果体彩网:undervalued relative to the market, hold them until they appreciate to a target🐷ed value, then sell for a respecta🌺ble gain.

Fundamentally, this is a prudent approach and helps minimize your fund's 澳洲幸运5官方开奖结果体彩网:taxable events and 澳洲幸运5官方开奖结果体彩网:expense ratios.

Fewer transactions imply lower trading costs and a smaller short-term 澳洲幸运5官方开奖结果体彩网:capital gain. However, simply investing in funds with low turnover rates is not actually an 澳洲幸运5官方开奖结果体彩网:investment strategy, and it's no excuse for poor performance.

Many investors and money managers who espoused this buy-and-hold, low-turnover approach have seen disappointing results. This is particularly true for those who recently saw "value" in financial stocks. Buying them on the cheap and holding them for a long period may have seemed prudent at the time, but, as the chart below illustrates, some mutual funds with low turnover rates have 澳洲幸运5官方开奖结果体彩网:underperformed the S&P 500 Index's 11.48% annual total return over a five-y♏ear period through Feb. 28, 2019.ꦐ

Growth Funds

澳洲幸运5官方开奖结果体彩网:Growth funds, on the other hand, tend to have a higher turnover rate, as their 澳洲幸运5官方开奖结果体彩网:money managers are constantly on the lookout for sectors and securities that are the next leaders in their respective industries. The type of 澳洲幸运5官方开奖结果体彩网:management strategy𒈔 these funds employ is based on finding unde😼rvalued stocks, selling high, and making the most of opportunities, which means there can be a lot of buying and selling during any given year.

As implied above, a higher turnover rate means the fund will incur more taxable events, and that is likely to eat into its 澳洲幸运5官方开奖结果体彩网:total return. A high turnover ratio may also indicate that the fund's costs are relatively high even for its category. In any case, high-turnover funds really must 澳洲幸运5官方开奖结果体彩网:outperform value funds if all else is equal.

Similar to the case with value funds, the turnover rate (high, in this case) is only justified when there is a high investment return. Unfortunately, many fund managers appear to be day-trading in disguise. The chart below shows some high-turnover funds with lackluster five-year returns, all of which lag the S&P 500 Index 澳洲幸运5官方开奖结果体彩网:benchmark.

Index Funds

If you are investing in an 澳洲幸运5官方开奖结果体彩网:index mutual fund, the passive nature of the security naturally means its turnover ratio should be very low. As their name implies, indexed funds are built to track given indexes🧸, and require almost no hands-on management. Stocks are only added or removed when the underlying index posts a change.

An index fund with a high turnover rate is not being properly managed. Anything over 2𝄹0 to 30% should be viewဣed with skepticism or concern.

The Bottom Line

Another consideration for investors when evaluating mutual fund turnover is the type of investment accounts in which the funds are located. Non-retirement accounts are more likely to incur taxable events, and so funds with low turnover rates may be more appropriate. Retirement accounts with tax-deferred (401k) or tax-free status (Roth IRA) may be more appropriate f🃏or mutual fun⛄ds with high turnover rates. In any case, investors should do their homework to determine the right mix for them.

There are many online sources for finding the turnover rates of a particular fund. Yahoo! Finance, Morning🅷star, WSJ.com, and many others provide mutual fund turnover data on almost all mutual funds. Some websites also list the average turnover rate for t🐻he category (type of fund).

The turnover rate of your mutual fund is really a measure of the frequency of transactions. In general, when determining whether to purchase a particular mutual fund, investors should analyze the turnover rate in conjunction with several other considerations. No particular fund turnover rate is perfect for your investment 澳洲幸运5官方开奖结果体彩网:portfolio; in🐭stead, it should be used as a complementary decision-making tool.

Other indicators, such as expense ratios, load/no-load, 澳洲幸运5官方开奖结果体彩网:management tenure, investment philosophy, and performance are (at least) as important as the turnover rate in helping you make the right investmen🎃t decisions.