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Turnover in etfs/mutual funds
Old 09-14-2014, 07:44 PM   #1
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Turnover in etfs/mutual funds

Something I've never really understood: do I need to be concerned with fund turnover in a tax-advantaged retirement plan?

In a regular account, what is the affect of high turnover on the numbers? I can't really subtract an amount from the return like I can with an expense ratio right (eg a 7% yearly return with a 1% expense ratio is actually a 6% return)? Because the performance of the fund is already taking into account whatever turnover there was and the associated taxes?
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Old 09-14-2014, 10:45 PM   #2
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...... I can't really subtract an amount from the return like I can with an expense ratio right (eg a 7% yearly return with a 1% expense ratio is actually a 6% return)? ....
A fund that has a 7% return, with a 1% E/R, still has a 7% return. Fund returns include all costs to the fund.

A fund with high turnover may have lower returns due to the cost of selling assets internal to the fund.

For a fund held in a Tax-Advantaged account, I wouldn't think there would be any negative effects, other than possibly lower returns due to the asset churn.
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Old 09-15-2014, 09:54 AM   #3
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As far as I know, that's only the case in the fund's prospectus. So on any website that will display a 1-year, 3-year, 5-year return, presumably this is calculated on the spot and is exclusive of the expense ratio? Because expense ratios can also change every year, I don't see how any historical return figure could include an expense ratio.
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Old 09-15-2014, 10:36 AM   #4
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Total returns are reported after expenses.

InvestRight Principle #5: The Relationship Between Expenses and Returns - Wells Fargo Advantage Funds

Are Mutual Fund Returns Reported Net of Expenses? | Finance - Zacks

The investment return reported by a mutual fund is always calculated net of expenses.
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Old 09-15-2014, 01:58 PM   #5
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Turnover directly affects only possible capital gains, I think. The more buying and selling within the fund, the more chance that you'll be exposed to short and long term capital gains distributions.

As a secondary effect, it also indicates a fund manager that appears to be timing the market to some degree and not willing to buy a company and hold it for a few years. That might be a red flag for some investors.

Reported total returns are net of fees, but do not include taxes, which are different for everyone. Morningstar does calculate example returns that include example taxes, and a high turnover rate may affect those example returns. Obviously if you are using a tax-advantaged account than those capital gains taxes won't matter to you. In a taxable account capital gains distributions may matter to you if you don't pay the 0% tax rate within a low tax bracket.
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Old 09-15-2014, 05:54 PM   #6
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No effect in a tax advantaged fund. The impact of turnover is in taxes. Hi turnover may lead to short and long term capital gains that might not be realized in a fund with little turn over. the costs outside of the tax impact are already baked into the returns figure. So, in a tax advantaged account, it is of no concern
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Old 09-16-2014, 04:01 PM   #7
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Thanks for the clarification. So the capital gains taxes for fund turnover are directly passed over to me, and I would receive some sort of filing at the end of the year to be reported on my April taxes?

Regarding performances and expense ratios, is it the same for ETFs? When ETF performances are reported are they net of expense ratios?
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Old 09-16-2014, 04:49 PM   #8
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Thanks for the clarification. So the capital gains taxes for fund turnover are directly passed over to me, and I would receive some sort of filing at the end of the year to be reported on my April taxes?

Regarding performances and expense ratios, is it the same for ETFs? When ETF performances are reported are they net of expense ratios?
Typically the fund or the brokerage house (depending on how you hold the fund) would send a 1099 div and report the capital gain distributions on line 2a. If a brokerage the distributions would go to the attached money market fund, if directly held from the fund, it could either be reinvested in the mutual fund, or be paid by check.
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Old 09-17-2014, 12:20 PM   #9
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Thanks for the clarification. So the capital gains taxes for fund turnover are directly passed over to me, and I would receive some sort of filing at the end of the year to be reported on my April taxes?

Regarding performances and expense ratios, is it the same for ETFs? When ETF performances are reported are they net of expense ratios?
not in a tax deferred account. There would be no taxes to pay until the money is withdrawn. In a taxable account, you would receive a 1099 from the brokerage with the capital gains and dividends that were distributed to the account.
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