Portfolio Turnover
A measure of how frequently a fund's holdings are bought and sold over a given period.
What is Portfolio Turnover?
Portfolio turnover is a metric that measures the rate at which a mutual fund, ETF, or investment portfolio replaces its holdings over a specified period, typically one year. Expressed as a percentage, a 100% turnover rate means the equivalent of the entire portfolio was bought and sold over the year, while a 200% rate indicates the portfolio was turned over twice. High portfolio turnover generates more trading commissions, bid-ask spread costs, and realized capital gains distributions, all of which reduce after-tax returns for investors. Passive index funds typically have very low turnover rates—often under 10%—because they simply track an index with infrequent changes, while actively managed funds may have turnover rates exceeding 100% as managers trade frequently in pursuit of outperformance.
Example
An actively managed large-cap growth fund reports a 120% annual portfolio turnover rate, meaning it effectively replaced its entire portfolio and then some over 12 months. The resulting capital gains distributions and transaction costs reduced the fund's after-tax net return by approximately 0.8% compared to a low-turnover index alternative.