I’ve seen many comments about turnover rates. What exactly is a turnover rate and how important is it to look at when deciding to pick a fund? What is a good rate?
It means how frequent they allocate the investments, in other words, how often they buy and sell different stocks. By the way, if turnover rate is too high it will affect your taxes whenever you decide to sell, unless you are investing inside a Roth IRA.
It’s about how much buying and selling a fund manager does. Could add up to a higher tax burden if not tax sheltered.
Actively managed funds are better in the Roth than a taxable account because of the capital gains they’ll distribute at the end of the year.
A mutual fund with the same turnover rate would likely have larger capital gains payouts due to the ETF ability to transfer shares without having to sell and repurchase.
However it still has gains. I don’t think they are big or high. $780 on every 100k for 2020. And of course that’s how much was produced. Not how much tax you owe.
As opposed to a mutual fund, I estimate the gains would have been about 4-6x that based on my mutual fund I have with comparable turnover ratio. Of course it’s hard to compare exactly.
Turnover rate simply describes the amount of turnover within the fund or how often stocks are bought and sold in order to rebalance, match the index, or meet fund requirements as part of active management. You pay for that management already in the expense ratio.
Turnovers may result in higher taxable distributions though which is only a concern in taxable accounts.
It’s important in a brokerage account. Not so important in tax deferred retirement account. That’s why low turnover is good for parking money in something like a 500 index fund with low turnover when you’re saving for a purchase.
Turnover is how actively managed fund managers try to beat the benchmark, by selling poor performing underlying funds and add more or new of good funds. So it is important and also important to understand the tax implications of the turnover as well.
If it is in taxable account, you want to pay very close attention to that number. Can be expensive at the end of the year.
It is only important outside a tax-favored account. It means nothing in IRA, 401(k), etc.
If you have a brokerage account with mutual funds, when the account manager sells a stock, you have to pay taxes on the profit even if you don’t take it out of the mutual fund. The less turnover rate, the less chance of paying taxes.