When you invest in a fund turnover, the rate at which a mutual fund or ETF buys and sells its underlying assets within a year. Also known as portfolio turnover rate, it tells you how active the fund manager is—and how much you might be paying in hidden costs. A fund with 100% turnover means it replaced all its holdings in one year. A 500% turnover? That’s the same as replacing the entire portfolio five times. High turnover doesn’t mean better performance. In fact, it often means higher fees, more taxes, and less money in your pocket.
Fund turnover ties directly to expense ratios, the annual fees you pay to own a fund. Every trade costs money—brokerage fees, bid-ask spreads, even market impact. Those costs get baked into the fund’s expense ratio. But there’s another sneaky cost: taxes. If a fund sells stocks at a profit, it triggers capital gains distributions. Even if you didn’t sell anything, you still owe taxes on those gains. That’s why low-turnover funds, like index funds, often outperform high-turnover ones after taxes and fees.
It’s not just about costs. High turnover can also signal a manager chasing trends instead of sticking to a plan. Look at the portfolio rebalancing, the process of adjusting your holdings to maintain your target asset allocation. Smart funds rebalance slowly and deliberately, not frantically. You’ll find plenty of examples in the posts below: some funds use dividends and coupons to rebalance without selling, others use direct indexing to avoid turnover altogether. Even hybrid advisors now recommend low-turnover strategies for long-term investors who want to sleep better at night.
Don’t assume a busy fund is a good fund. Some of the best-performing funds over decades have turnover rates under 20%. Others, especially actively managed ones, hit 300% or more—and still underperform the S&P 500. The key is to match turnover to your goals. If you’re in a taxable account, avoid high-turnover funds like the plague. If you’re in a 401(k) or Roth IRA, you’ve got more room to breathe—but even then, lower turnover usually means higher net returns.
The posts below break down exactly how turnover affects your returns, which funds keep it low, and how to spot the ones that are costing you more than they’re worth. You’ll see real data from top platforms like Vanguard and Fidelity, learn how to compare turnover rates side-by-side, and find out why some of the smartest investors avoid turnover entirely. No fluff. No jargon. Just what you need to make smarter choices with your money.
Fund turnover directly impacts your after-tax returns through trading costs and capital gains taxes. Learn how high turnover erodes wealth, why ETFs are more tax-efficient, and how to choose funds that preserve your returns.
5 Comments
