Formula, in general
Portfolio Turnover Formula
Portfolio turnover measures how much of a portfolio is replaced over a period. The standard fund definition takes the lesser of total purchases or total sales and divides by average net assets. High turnover signals frequent trading, which compounds into transaction costs, market impact, and (in taxable accounts) tax drag, all of which a strategy's gross return must overcome.
4 variables. Published May 26, 2026. By AI Fin Hub Research.
Turnover = min(Purchases, Sales) / AverageNetAssets
Weight-change form: Turnover = (1/2) x sum_i |w_i,new - w_i,old| Variables
Purchases
Total purchases
Total dollar value of securities bought during the period.
Sales
Total sales
Total dollar value of securities sold during the period. Taking the lesser of purchases and sales avoids counting flows from new subscriptions or redemptions as portfolio trading.
AverageNetAssets
Average net assets
The average value of the portfolio over the period. Normalizing by it makes turnover a fraction comparable across portfolio sizes.
w_i,new - w_i,old
Weight change
Change in each asset's portfolio weight between rebalances. The one-half sum of absolute weight changes is the rebalance-level turnover, equal to the fraction of the book traded one way.
Step by step
- 1
Sum the value of all purchases and all sales over the period.
Over a year, purchases total 600,000 and sales total 550,000.
- 2
Take the lesser of the two.
min(600,000, 550,000) = 550,000.
- 3
Compute the average net assets over the period.
Average net assets are 1,100,000.
- 4
Divide the lesser of purchases or sales by average net assets.
550,000 / 1,100,000 = 0.50, a 50% turnover.
Worked example
Annual turnover of a 1.1M portfolio and its cost drag
Purchases / sales
600,000 / 550,000
Average net assets
1,100,000
Round-trip cost
20 bps
Turnover = min(600,000, 550,000) / 1,100,000 = 550,000 / 1,100,000 = 0.50 = 50%. Cost drag estimate: a 50% one-way turnover implies trading half the book, and at 20 bps round-trip the annual cost is roughly 0.50 x 0.0020 = 0.0010 = 10 bps. (Doubling for both buy and sell legs, conventions vary; here 20 bps is the full round-trip applied to the traded fraction.)
Annual turnover of 50%, meaning the equivalent of half the portfolio was replaced over the year. At a 20-bps round-trip cost this adds roughly 10 bps of annual drag on gross return. Turnover is the link between a backtest's paper alpha and its net result: a signal worth 30 bps gross that trades at 300% turnover can easily give all of it back in costs.
Common variations
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Sources
- Form N-1A: Registration Statement (Turnover Rate Instructions) , U.S. Securities and Exchange Commission
- Shedding Light on 'Invisible' Costs: Trading Costs and Mutual Fund Performance , Roger Edelen, Richard Evans, Gregory Kadlec, Financial Analysts Journal 69(1), 33-44 (2013)
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