Question

Which of the following is TRUE about portfolio turnover in index funds compared to actively managed funds?

Accepted Answer

Index funds have lower turnover as they only change holdings when the index is reconstituted — Index funds replicate a fixed benchmark and only trade when the index itself is reconstituted (securities added or removed). This results in very low portfolio turnover (typically 5–15%), keeping transaction costs minimal — a significant advantage over actively managed funds with higher turnover.