Young & Invested: Missing this ETF detail may cost you
A small oversight that can quietly shift your long‑term returns.
Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.
This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 50
ETF investors are consistently bombarded with a plethora of so-called obvious advice. Past performance and fees are the first things we’re told to look at, and for good reason. But for many, I’d argue that’s where the analysis typically ends.
This article marks the 50th edition of my Young & Invested column. Over half of my coverage has been about ETFs. This is partly due to their popularity, but also because the deeper I go, the more evident it becomes that there is a whole layer of mechanics sitting beneath the surface.
We often look at ETFs through a big-picture lens, but that simplicity can be misleading. Fund technicalities rarely get attention. One of the most overlooked metrics is fund turnover. Admittedly, it’s doesn’t quite have the magnetism of a performance chart, but it deserves just as much attention.
What is fund turnover?
Fund turnover shows how much a fund’s holdings have changed over the course of the year.
Funds are typically assigned a turnover ratio, which is measured by the total value of securities the fund bought or sold (whichever is smaller), divided by the fund’s average assets over the year. The resulting percentage gives a sense of how much trading activity occurred within the fund overall.
For example, an ETF with a turnover ratio of 20% means it turned over the equivalent of one fifth of its portfolio during the year, whilst a turnover ratio of 100% means the fund completely turned over the entire portfolio. Importantly, a turnover ratio of 100% doesn’t insinuate the manager sold everything and started from scratch, there is a good chance some holdings might not have changed at all.
Broad market index ETFs tend to have low turnover as the underlying indices can be less volatile. Actively managed funds or rules-based strategies that respond to shifting signals might trade frequently to maintain their desired exposure.
Why should investors care about turnover?
For a metric that usually appears as a footnote in a report, turnover can actually have a substantial impact on your investment outcomes.
Beyond what the measure reveals about a fund’s investment strategy, there are also significant tax considerations. A general misconception is that if you hold your ETF units for over 12 months, you automatically qualify for the 50% capital gains tax (CGT) and have reasonable control over the tax outcomes. Unfortunately, this is not entirely the case. The CGT discount only applies if the ETF itself held the underlying investments for more than a year before selling them.
If a fund is mandated or chooses to sell investments in quick succession, there is a higher likelihood of capital gains being realised in the short-term. This tax is then passed on to the investor. Those in high-turnover funds may end up with a larger, more volatile tax bill than expected (even if you didn’t sell the position).
This has implications for all investors, but particularly for those with longer horizons. A fund can look great on paper but if it’s constantly realising short‑term gains and pushing them out to you, you’re effectively paying tax on the fund’s trading decisions rather than your own.
Two funds with similar pre‑tax performance can deliver very different outcomes simply because one trades far more than the other. Fund turnover is also considered a proxy for trading costs. When a fund buys and sells frequently it incurs the usual costs of brokerage and spreads. A high turnover ratio indicates that more trading is occurring and less of the gross potential return is making its way to investors. Even if these costs aren’t explicitly itemised for us, they do impact outcomes.
Beyond costs and tax, the turnover ratio also gives you a sense of how a fund’s process plays out in practice. However, it would be oversimplification to suggest it’s just a measure of how ‘active’ or ‘passive’ a strategy is.
Some strategies naturally trade more because of how their models work or because the opportunity set shifts. For example, factor ETFs may cap how much they can trade at each rebalance so they don’t churn the portfolio unnecessarily. But even though an ETF tries to limit turnover, the rules still require it to update the portfolio to reflect shifting market dynamics. If volatility spikes, the fund can end up trading right up to its turnover cap even though the manager isn’t trying to be ‘active’. In other words, turnover reflects both the manager’s approach and the market environment.
Turnover and ETF performance
Performance tends to be key consideration for most investors (and rightfully so). The important question is whether high turnover can help or hinder this. Research from the Morningstar US team found that the picture wasn’t exactly flattering for high-turnover funds.
ETFs (passive and active) that traded the least typically showed better performance by a long shot. Those with the lowest turnover outperformed their average Morningstar Category peers by an average of ~2% annualised over the three years to 2025. Funds that traded the most also came with higher fees and trading costs which weighs on returns.
It is often touted that index funds are immune from high turnover, however we didn’t find this to be the case. While fewer index funds fell into the highest-trading buckets, they still made up the bulk of ETFs in every bucket.
Although it needs to be said that the landscape has changed. Index ETFs nowadays track a pile of benchmarks that are far more complicated. With fewer indices using market-cap weighting and the number of stocks they hold declining on average, this result is unsurprising.
Concluding thoughts
So what is a good turnover ratio?
If you’ve had little success in googling this, you’re not alone. Depending on the source, I’ve seen ranges from 5% and 50% being deemed as reasonable. This dispersion is not so much an academic dispute, then it is a representation of the sheer landscape of products that exist and the individual circumstances of each investor. It’s called personal finance for a reason. The reality is that there is no universal benchmark for fund turnover. The right level of turnover will depend entirely on what an investor an investor is trying to achieve.
Of course, it goes without saying that you shouldn’t judge a fund on any one metric in isolation. A broad market fund will look very different to a small cap fund. The number only becomes meaningful when you compare it with funds in the same category. For example, if most ETFs in a select category sit around 5% turnover but one fund is up at 30%, that’s a signal to dive deeper into what’s driving the extra trading.
Ultimately, all these numbers are somewhat arbitrary. I understand that statement seems a little ironic for someone who just dished out 1300 words about a formula. My point is that they’re just tools to guide our decisions. I believe that it pays to set boundaries or goalposts for what we exclude from a portfolio, but you shouldn’t be spending hours obsessing over minuscule differences. For most, investing is simply a means to an end. We don’t care about turnover for turnovers sake, we care about whether a fund aligns with our investment strategy and thus helps us reach out goals.
If you’re a long-term investor who wants to defer as much tax as possible and keep things simple, preferencing low turnover ETFs makes sense. On the other hand, if you’re comfortable with more complexity or you’re investing for a specific purpose, a higher turnover fund might still fit.
