What is Turnover Ratio?

Turnover ratio is a term that can be used in reference to the rate at which a company goes through its physical inventory, or that a mutual fund sells and replaces its investment holdings.

In the context of a company’s inventory of goods, a high turnover ratio is a positive sign. It means that a company is selling plenty of its products and is not wasting money on more warehousing space than it needs. This kind of turnover ratio is calculated as the cost of goods sold in a period divided by the average inventory during that time. In the context of mutual funds and ETFs, turnover ratio is a negative thing if it is high.

It means that the fund is selling and replacing more of their securities, and if there are any gains associated with the securities sold, the fund will be passing tax implications on to the investor. There is a good chance that with high turnover many of the securities sold within the fund were held for less than a year, which subjects the investor to short-term capital gains taxes, which are currently at income tax rates.

High turnover also might mean the the fund managers have a lot of billable hours piling up that they will seek to cover with higher management fees per mutual fund share. Index funds tend to have lower turnover ratios than other types of funds.