A mutual fund's expenses and trading costs should be at or near the top of the list when you're weighing the factors most likely to influence long-term returns. Studies show high expenses to run a fund and hefty costs from a fund's frequent trading can go a long way to offset whatever smart moves a manager can make.

A mutual fund's expenses and trading costs should be at or near the top of the list when you're weighing the factors most likely to influence long-term returns. Studies show high expenses to run a fund and hefty costs from a fund's frequent trading can go a long way to offset whatever smart moves a manager can make.

While it's relatively simple to understand and measure a fund's operational costs by looking at its expense ratio, it's not so easy with the charges that stack up each time managers adjust their portfolios. Trading costs from brokerage fees and other transaction expenses can rival or even surpass the hit investors take from high expenses.

But they're not easily quantified, can fluctuate wildly depending on the markets, and are largely invisible.

And the more frequently a fund trades, the more likely it is to generate capital gains that can cost investors at tax time.

But these days, you may want to cut managers a little slack if their funds' holdings have been turning over faster than pancakes on a griddle.

Volatile markets have created opportunities for fund managers to pick up bargain stocks and sell when they get too pricey. Sure, such deft moves can juice fund returns. But those gains are being partly offset by higher turnover — even at funds that focus on buying and holding a few choice stocks, where trading costs normally would be minimized.

That means the standard rules about how to gauge what's an appropriate turnover ratio could be out the window, at least until calm returns to the markets for the long haul.

"Given how massive the changes in the markets have been, I would certainly tolerate a higher turnover rate now than I would have last year," Morningstar Inc. fund analyst Russel Kinnel said.

A fund's turnover ratio reflects the proportion of the fund's holdings that have been traded within the 12 months.

A turnover ratio of 50 percent means half of the fund's holdings have changed hands in a year and is generally considered a high water mark. If the ratio exceeds that level, you may want to steer clear, unless the fund's investing style justifies frequent trading.

But good luck finding many funds that have managed to stay below that level lately.

Turnover has risen at about two-thirds of the stock funds that have posted updated numbers since late March, according to fund tracker Lipper Inc. The rise reflects trading during last fall's market plunge and this year's more moderate-but-still-high volatility.

And Morningstar research shows the latest median turnover ratio — the point at which half were above and half below — stands at 67 percent for stock funds, up from 60 percent in 2007 and 57 percent in 2005. The median is expected to rise further as more funds issue fiscal year reports with updated turnover figures.

Turnover ratios are generally higher at funds in more aggressive niches, like growth-oriented stocks with rapidly rising earnings, and often-volatile small-caps.

But even some funds that consider themselves buy-and-hold practitioners investing in a small number of value-oriented stocks — traits that might appeal to investors seeking to limit trading cost exposure — are seeing turnover increase.

Take the $37 million Appleseed Fund (APPLX), which posted the top return of 11.4 percent among midcap value funds over the last 12 months, according to Morningstar.

Appleseed's focus on holding just a couple dozen stocks for the long haul kept the fund's turnover ratio at just 27 percent in the first year after its December 2006 launch. But last year, the ratio swelled to 128 percent as trading increased nearly fivefold.

Adam Strauss, a portfolio manager at Appleseed, said the young fund hopes to stick with its goal of keeping turnover low and holding just 20 to 30 stocks.

But the market's wild ride created opportunities that were too hard to pass up, he said, and the fund's recently strong returns have more than offset its spiking trading costs.

"We had stocks we would buy, and then the stock's price would appreciate 50 percent in a month — with no change in the stock's fundamentals — so we sold it," said Strauss, who expects the fund's turnover to return closer to his goal of 20 to 30 percent as markets calm. "We took advantage of the volatility, and that helped us outperform." Another recent strong performer, the Fairholme Fund, saw its turnover jump from 14 percent in 2007 to 81 percent last year. It's also a concentrated fund with less than 30 holdings.

All told, trading costs can have a more powerful effect on returns than fund expenses, according to several studies, including recent research by Morningstar.

While funds must publish their turnover ratio, they're not required to disclose actual trading costs. This means that ratios don't precisely reflect actual costs because expenses from a trade may vary widely among funds.

There's no standard way to calculate the costs, so most investors are stuck with considering a fund's turnover ratio as a relative gauge to indicate the potential expenses the fund may incur.

Morningstar is working to begin publishing estimated trading costs — including comparisons of similar funds within a category — but the project is still in the works. It's an attempt to shed light on what Morningstar's Kinnel calls the fund industry's equivalent of "dark matter," the mysterious particles that astronomers believe exert a strong gravitational pull even though they can't be detected.

"There are way too many funds with over 100 percent turnover," Kinnel said. "There are a few where it's justified, but they are many where it isn't."