Annual Holdings Turnover - Explained
What are Annual Holdings Turnover?
Written by Jason Gordon
Updated at April 17th, 2022
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Table of Contents
What are Annual Holdings Turnover?How Does Annual Holdings Turnover Work?About Annualized TurnoverAnnual Turnover CalculationAcademics Research on Annual turnoverWhat are Annual Holdings Turnover?
Annual holdings turnover refers to the percentage rate at which an exchange-traded fund or mutual fund replaces its holdings on investment every year. Turnover involves comparing assets under management to the security holdings outflow or inflow. Annual holdings turnover figures are important when it comes to determining the activeness of the fund changes underlying position when in its holdings. A turnover rate with a high figure is an indication the fund is actively managed. Those with a low figure indicate that the funds are passive hence a low turnover rate.
Back to:INVESTMENTS & TRADING
How Does Annual Holdings Turnover Work?
Some index funds adopt a strategy known as buy-and-hold. A good example of the fund that applies this strategy is the Fidelity Spartan 500 Index Fund. This system ensures that funds own positions in equity provided that they continue to be components of the benchmark. The funds usually maintain a positive and perfect correlation to the index, turning the portfolios turnover rate to 5%. What happens is that there is usually limiting trading activity to purchasing securities inflows. Also, the infrequently selling issues are eliminated from the index. So, most of the time, 60% indices outpaces the managed funds. It is worth noting that a high turnover rate has never been a fund quality or performance indicator.
About Annualized Turnover
Annualized turnover refers to a future projection based on either one month or an investment turnovers shorter period of time. It helps an investor to estimate the coming years annual turnover. For example, if the month of February has a turnover rate of say 5%, then an investor can multiply one months turnover rate by 12. From this example, it means that the calculation will provide a 60% annualized holdings turnover rate.
Annual Turnover Calculation
The total amount of the purchased or sold assets must be available to be able to calculate the turnover ratio. Lets say a fund is holding $100 million in assets under management, also known as AUM. Lets also assume that $75 million of those assets undergo liquidation during the measurement period. In this case, the annual calculation turnover will be as follows: Assets sold/AUM= Turnover rate (which as per the example is 75%)
