Turnover is a Big Deal

A cherry turnover is good, but sometimes turnover is bad.

I like turnovers. I especially like cherry turnovers, but I can’t eat them if they have gluten. When it comes to investing, I dislike high fund turnover rates. There are five things I review when I am buying an index mutual fund or an ETF. The must-haves are a low expense ratio, decent dividend yield, dividend growth, good diversification, and LOW TURNOVER. That is why ETF VYM is one of my major holdings in my IRA. I also like SCHD, which has a reasonably low turnover rate as well. Both DVY and DGRO also have sensible turnover rates, even though they are higher than VYM’s.

“A high turnover rate is not something you want in a stock fund. Let’s look at performance numbers to see why. When fund managers frequently trade a stock fund, it produces lower returns than if they trade less than 15% each year.” (See NASDAQ link below for complete article.)

What is Turnover?

“Turnover is the measure of what percentage of the stocks making up a fund are sold and exchanged for new ones each year.” (NASDAQ) Said simply, some fund managers chase performance by buying and selling positions in their fund with the goal of trying to “beat the market” or beat the index they claim they are tracking. But turnover doesn’t necessarily equal better returns. Some studies have shown that you actually do better with a good fund with low turnover. Why pay more for less success?

Quotes above are from: NASDAQ Articles

Vanguard’s VYM has 7.0% turnover and an extremely low expense ratio of 0.06%. The diversification is excellent at almost 400 positions. Do you know the turnover ratios for your funds? You should.