The cost of turnover in investing

Another cost of investing that doesn’t show up in the expense ratio of a fund is the cost of turnover. Turnover is the rate at which a fund buys and sells investments. A turnover rate of 100% means that, on average, the fund manager buys and sells stocks or bonds with a value equivalent to that of the entire investment portfolio each year. Every time the fund manager buys or sells a stock or bond, she incurs expenses — brokerage commissions and other administrative costs. The higher the turnover rate, the more frequent trading of securities the manager is engaged in, and the higher the trading costs. Over time, high turnover can be a significant drag on the profits of a fund.
You can find the fund’s turnover rate in the prospectus. The least actively managed funds, such as an index fund, may have a very low turnover rate of just 5% to 10%. A very actively managed fund may have a turnover rate of 500% or more, meaning that each security in the fund is held, on average, for just about one-fifth of a year — 10 weeks or so — before being sold.
In general, turnover rates of less than 30% are considered low; 30% to 100% is average; over 100% is high. If every other comparative point is equal, choose a fund with a lower turnover rate because more efficient fund management is likely to earn you greater profits in the long run.