One number, three very different years#
Take VFV, the Vanguard S&P 500 ETF on the TSX, as a worked example. A $1,000 investment at inception grew to $6,561 by April 2025. That’s a 16.25% compound annual return, and it’s accurate.
Now the annual results behind it:
| Year | Return |
|---|---|
| 2021 | +27.64% |
| 2022 | −12.69% |
| 2024 | +35.24% |
Not one of those is 16.25%. The compound figure is a mathematical summary of a path, and the path is what you actually live through.
This isn’t a quirk of one fund. Dimensional’s work on annual returns found that the S&P 500’s yearly result landed within two percentage points of its ~10% long-run average in only six of 93 calendar years. The average return is a number that almost never happens.
Why this matters more than it sounds#
If you plan around 16.25%, you’ve built a plan around a year that doesn’t occur. Worse, you’ve calibrated your expectations to the smooth version, which means the rough version arrives as a shock rather than as scheduled weather.
The fact sheet gives you a better calibration tool, and almost nobody uses it: the worst three-month return. VFV’s is −13.68% — $1,000 becoming $863 in a quarter.
Convert that to your actual number. On $40,000, it’s a $34,500 statement. The question isn’t whether you understand volatility conceptually. It’s what you do the evening that statement arrives.
If the honest answer is “sell,” the CAGR is irrelevant, because you won’t be there to collect it.
The metrics that tell you the fund is honest#
Three risk numbers do different jobs, and they’re commonly read as one.
Standard deviation measures how much returns vary year to year. It’s the raw volatility figure.
Beta measures movement relative to the benchmark. A beta of 1.00 means lockstep with the S&P 500, which is exactly right for a tracker and would be a red flag on anything sold as defensive.
R-squared tells you what proportion of the fund’s movement is explained by the benchmark. Near 1.00 means the fund is genuinely tracking what it claims to track.
Beta and R-squared verify the product does its job. They tell you nothing about whether you can hold it. Only the drawdown numbers do that, and they’re the ones printed smallest.
The two prices, and the spread between them#
A quick mechanical note that saves real money on niche funds.
Every ETF has a NAV — the end-of-day value of its holdings divided by units outstanding — and a market price set by supply and demand during trading hours. For a well-run fund these barely diverge: VFV’s bid-ask spread was 0.02%, meaning you transact essentially at true underlying value.
On a thinly traded ETF that spread can be twenty times wider, and you pay it twice, entering and exiting. It never appears in the expense ratio and it’s rarely mentioned in the marketing.
The fee is the one number that behaves#
Here’s the pleasing inversion. Everything above is uncertain — returns vary, drawdowns surprise, spreads move. The MER is fixed and knowable.
VFV charges 0.09%: 90 cents a year per $1,000. Actively managed funds routinely charge 2% or more. A 0.41% difference between two similar ETFs compounds into thousands of dollars over 30 years.
While you can’t control which years arrive, you can control this to the basis point. That asymmetry is why cost discipline is the most reliable decision in investing — it’s the only input with a guaranteed effect.
And check what you’re actually holding#
The final piece of calibration. VFV tracks the S&P 500 and holds 505 companies, but as of April 2025 the top ten made up 35.6% of the fund: Apple 6.8%, Microsoft 6.2%, Nvidia 5.6%, Amazon 3.7%, Alphabet 3.6%. Nvidia alone had grown to 8.0% by September.
Sector-wise: Information Technology at 30.4%, rising to 34.8% by September, ahead of Financials 14.4% and Healthcare 10.8%.
Which loops back to the drawdown question with a sharper edge. A fund that’s a third technology by weight will produce a worse worst-quarter in the next tech correction than the one printed on today’s fact sheet. The −13.68% describes a fund with a different composition than the one you’re buying.
Summary — and what to do about it#
The compound return tells you where the fund ended. The annual column tells you what you had to sit through.
- Read the year-by-year returns, not just the CAGR. +35%, −13%, +28% is the actual product.
- Expect the average almost never to happen. Six years in 93 landed within two points of the long-run average.
- Convert the worst 3-month return into your own money. That’s the calibration exercise that matters.
- Use beta and R-squared to verify the fund, not to reassure yourself about risk. Different jobs.
- Check the bid-ask spread on anything niche. Paid twice, invisible in the MER.
- Control the fee, since you can’t control the years. 0.09% versus 2% is the one guaranteed edge on the page.
- Recheck the sector table annually. Today’s concentration determines tomorrow’s worst quarter.
The fund’s history is fixed. Your holding period isn’t — and that’s the variable the compound annual return can’t see.
Sources & further reading#
- Dimensional, “The Uncommon Average” — annual S&P 500 returns landed within 2 points of the average in only six of 93 years.
- Kapio Analytics, S&P 500 historical returns since 1926 — the long-run average the annual figures deviate from.
- Slickcharts, S&P 500 total returns by year — year-by-year dispersion around the mean.
- AlphaEx Capital, S&P 500 sector breakdown 2026 — current technology weighting in the index.
