What is Portfolio Turnover?

Portfolio turnover is defined as the frequency with which portfolio assets are bought and sold over a specific period (typically a year). Depending on the type of strategy, portfolio turnover should be assessed on a relative basis against strategies with similar investment approaches. Higher turnover would incur higher transaction costs, which might translate into higher fees for investors, but could also contribute to higher returns that can offset those costs.

Key Learning Points

  • The portfolio turnover ratio represents the percentage of the portfolio’s holdings that have changed over a specific time frame (usually one year)
  • Turnover is calculated by taking the lesser of purchases or sales (excluding all securities with maturities of less than one year) and dividing by average monthly net assets
  • A lower turnover figure might indicate a buy-and-hold approach, while high turnover signals more frequent trading and may indicate a market-timing strategy
  • Higher portfolio turnover also leads to higher transaction costs and, in some cases, additional tax implications

How to Calculate Portfolio Turnover

The portfolio turnover rate is a measure used to assess how frequently assets within a portfolio are bought and sold over a specific period. Although the calculation methods may vary and some less popular methods account for adding and reducing the weight of individual positions, portfolio turnover is typically calculated by dividing total assets bought or sold during the period by the average monthly net assets for the period. Different regulators would often require asset managers to report on their portfolio turnover figures in annual fund reports by using an approved formula.

For example, the Financial Conduct Authority (FCA) in the UK mandates investment management firms to disclose the portfolio turnover rate for their products in the  simplified prospectus (a marketing document that contains information about the investment scheme) using the formula below.

As it includes both purchases and sales of securities, the regulator also requires an additional explanation where applicable.


Source: FCA

What is Portfolio Turnover Ratio in a Mutual Fund

The portfolio turnover ratio shows how a mutual fund’s portfolio has changed over a given period (most often one year). This figure is typically between 0% and 100% but can go even higher for some specialist strategies (including speculative and high frequency trading approaches that aim to exploit very short-term opportunities). A turnover rate of 0% indicates no change to the portfolio over the period, while a ratio of 100% means that all previous holdings were liquidated and have been replaced by new positions. For example, a 15% portfolio turnover ratio suggests that 15% of the portfolio holdings changed over a one-year period.

Managed Funds vs. Unmanaged Funds

An actively managed fund in general would be expected to have a higher portfolio turnover rate compared to passive products such as Exchange Traded Funds (ETFs). This is due to their more frequent trading activity in aiming to deliver a performance above a specific benchmark while passive approaches aim to replicate the performance of a market index. While in active management, a portfolio turnover of around 20% is considered low and typically an indication of a buy and hold investment strategy, passive funds tend to have much lower turnover ratios. For example, the Vanguard S&P 500 Index Fund, which replicates the performance of the largest 500 companies in the US by market capitalization, had just 2% portfolio turnover in 2023. (Source: Vanguard) However, with the evolution of the passive investment industry, index designers are now able to offer a much broader range of options that also includes specialist and niche indices that would have a reasonably high portfolio turnover rate compared to more traditional large cap indices. An example is the iShares MSCI ACWI Low Carbon Target ETF, which targets and overweighs companies with low potential and measured carbon emissions relative to higher carbon-emitting peers. In 2023, the fund had a turnover of 19%. (Source: BlackRock)

Portfolio Turnover Ratio and Investment Strategies

The portfolio turnover ratio provides a useful insight into a fund manager’s investment approach. Generally, annual turnover below 20% is considered low and indicates a buy-and-hold strategy. These managers would typically have a longer-term investment horizon with high conviction in their holdings. In addition, they may also benefit from lower transaction costs.

On the other hand, funds that exhibit higher turnover rates may be focusing more on the short-to-medium term opportunities, which can offset the higher trading costs if these transactions prove successful. For example, a study from Schroders Investment Management found that “on average, high turnover US equity funds have been able to add at least enough value to offset the additional transaction costs they incur”. (Source: Schroders)

However, the most important factor in analyzing portfolio turnover is consistency within the investment approach rather than the level of turnover itself.

Transaction Costs Explained

To achieve better net returns, investment managers emphasize minimizing transaction costs. Below we can see the different types of transaction costs as well as an explanation of what explicit and implicit costs are.

PE Fund Structure Imag

Source: JP Morgan Asset Management

Taxes and Turnover

When it comes to tax, higher portfolio turnover typically leads to increased tax implications for investors. The frequent buying and selling of assets can trigger capital gains tax on the profit realized from those trades. Such taxes can erode returns over time, especially if the investments are not held in tax advantaged accounts (although these are usually available to individual investors). Therefore, investors would often consider the tax consequences of their trading decisions.

Portfolio Turnover Example

A fund manager has purchased and sold $9 million and $7 million of securities, respectively, over one year.

Over the same period, the fund held average net assets of $50 million.

The fund’s portfolio turnover ratio is calculated by taking the lesser of purchases or sales (excluding all securities with maturities of less than one year) and dividing by the average monthly net assets.


An annual portfolio turnover of 14% means that 14% of the portfolio has changed over one year. This number is typically considered low and could indicate a buy and hold approach, or a more niche passive product. Practice calculating portfolio turnover and learn about an industry example with the portfolio turnover workout.

What is a Good Portfolio Turnover Ratio

Given that investment approaches differ widely, there isn’t a universal number that investors should aim for. Consider this on a relative basis against identical strategies. When analyzing portfolio turnover data, investors usually consider the following points:

  • Is the manager selling losers or winners?
  • What is the typical holding period for a stock?
  • Does the manager do any post-transaction analysis?
  • How does the most recent turnover rate compare to historical levels?

To analyze the full picture and address the above, investors may also need to perform performance attribution analysis that will give insight into the portfolio’s sources of alpha generation over the specified period.


Overall, there are various factors that need to be considered alongside the portfolio turnover data, including the type of strategy (i.e. active or passive) and its investment objective and style. In addition, trading costs and tax implications are also important and could erode returns if not carefully considered. Consistency is key – any unusual patterns in portfolio turnover rates, for example if it jumps from 30% to 90% on an annual basis, may be red flags and would require further investigation.

Additional Resources

Portfolio Performance

Portfolio Construction