# Understanding Annual Turnover: Definition, Formula, and Examples

![Annual Turnover: The percentage rate at which a mutual fund or ETF replaces its investment holdings on an annual basis.](https://www.investopedia.com/thmb/QkSI8ICMMukEhWsl-8Fv9sB-qHE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Annual-turnover_final-add43a9e0a4441a3b2a4a7f8732f5dfa.png)

*— Investopedia / Michela Buttignol*

> **Definition**
>
> Annual turnover measures the rate at which assets, securities, or inventory change ownership in a year, indicating activity levels in a mutual fund or business.

## What Is Annual Turnover?

Annual turnover relates to the frequency with which business or investment assets are replaced. The annual turnover rate can help investors and businesses understand investment fund activity and business efficiency. Annual turnover plays a significant role in fundamental decision-making, particularly in evaluating investment strategies and business operations. A high turnover rate by itself is not a reliable indicator of investment fund quality or performance.

### Key Takeaways

*   Annual turnover measures how often an entity replaces assets or holdings over a year.
*   High portfolio turnover suggests an actively managed fund, whereas low turnover implies a passive approach.
*   A high turnover rate does not inherently indicate fund quality or performance.
*   Inventory turnover helps businesses gauge sales efficiency and inventory management.
*   Annualized turnover projects future asset changes based on short-term data.ver rate by itself is not a reliable indicator of fund quality or performance.

## How to Calculate Annual Turnover for Investment Funds

To calculate the portfolio turnover ratio for a given fund, first determine the total amount of assets purchased or sold (whichever happens to be greater), during the year. Then, divide that amount by the average assets held by the fund over the same year.

﻿ $\begin{aligned}&\text{portfolio turnover}\ =\ \frac{\operatorname{max}\begin{cases} \text{fund purchases}\\ \quad \text{fund sales}\end{cases}}{\text{average assets}}\end{aligned}$﻿

For example, if a mutual fund held $100 million in [assets under management](https://www.investopedia.com/terms/a/aum.asp) (AUM) and $75 million of those assets were liquidated at some point during the measurement period, the calculation is:

﻿ $\begin{aligned}&\frac{\$75\text{m}}{\$100\text{m}}=0.75\\&\textbf{where:}\\&\text{m}=\text{million}\end{aligned}$﻿

It is important to note that a fund turning over at 100% annually has not necessarily liquidated all positions with which it began the year. Instead, the complete turnover accounts for the frequent trading in and out of positions and the fact that sales of securities equal total AUM for the year. Also, using the same formula, the turnover rate is also measured by the number of securities bought in the measurement period.

## Understanding Annualized Turnover in Investments

Annualized turnover is a future projection based on one month—or another shorter period of time—of investment turnover. For example, say an ETF has a 5% turnover rate in February. Using that figure, an investor may estimate annual turnover for the coming year by multiplying the one-month turnover by 12. This calculation provides an annualized holdings turnover rate of 60%.

### The Dynamics of Actively Managed Funds

Growth funds rely on trading strategies and stock selection from seasoned professional managers who set their sights on outperforming the index against which the portfolio [benchmarks](https://www.investopedia.com/terms/b/benchmark.asp). Owning large equity positions is less about a commitment to corporate governance than it is a means to positive shareholder results. Managers who regularly outperform indices keep their jobs and attract more investments.

While the passive versus active management argument persists, high volume approaches can realize moderate success. Consider the [American Century Small Cap Growth fund](https://www.morningstar.com/funds/XNAS/ANOIX/quote.html) (ANOIX), a four-star-rated Morningstar fund with a frantic 141% turnover rate (as of February 2021) that outperformed the S&P 500 Index considently over the last 15 years (through 2021).

### Exploring Passively Managed Fund Strategies

Index funds like the [Fidelity 500 Index Fund](https://www.morningstar.com/funds/XNAS/FXAIX/quote.html) (FXAIX) follow a buy-and-hold strategy. Following this system, the fund owns positions in equities as long as they remain components of the benchmark. These funds perfectly match their index, so they have a turnover rate of only 4%. Trading mainly involves buying securities from inflows and rarely selling removed issues. Historically, indices have outperformed managed funds over 60% of the time.

Also, it is important to note, a high turnover rate judged in isolation is never an indicator of fund quality or performance. The Fidelity Spartan 500 Index Fund, after expenses, trailed the S&P 500 by 2.57% in 2020.

## Understanding Inventory Turnover and Its Business Implications

Businesses use several annual turnover metrics for understanding how well the business is running on a yearly basis. [Inventory turnover](https://www.investopedia.com/terms/i/inventoryturnover.asp) measures how fast a company sells inventory and how analysts compare it to industry averages. A low turnover implies weak sales and possibly excess inventory, also known as overstocking. It may indicate a problem with the goods being offered for sale or be a result of too little marketing. A high ratio implies either strong sales or insufficient inventory. The former is desirable while the latter could lead to lost business. Sometimes a low inventory turnover rate is a good thing, such as when prices are expected to rise (inventory pre-positioned to meet fast-rising demand) or when shortages are anticipated.

The speed at which a company can sell inventory is a critical measure of business performance. Retailers that move inventory out faster tend to outperform. The longer an item is held, the higher its holding cost will be, and the fewer reasons consumers will have to return to the shop for new items.

## The Bottom Line

Annual turnover is the percentage rate at which mutual funds or ETFs replace their investment holdings. Calculating turnover rates can be useful in gauging how actively a fund is managed and its efficiency. Both high and low turnover rates can have different implications for fund quality and performance, and alone are not reliable indicators. Actively and passively managed funds have distinct characteristics and turnover rates, with growth funds typically showing higher rates due to active trading strategies. Turnover rates are also important when examining business inventory turnover and its impact on performance.