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Updated 2mo ago.
Updated 2mo ago.
Annualized return (or CAGR — compound annual growth rate) expresses an investment's return as if it had grown steadily each year. It allows fair comparison of investments over different time periods.
If VFV.TO (Vanguard S&P 500) generated a total return of 60% over 5 years, the annualized return is not simply 60% ÷ 5 = 12%. Accounting for compounding, it's approximately 9.9% per year. The formula is: (1.60)^(1/5) - 1 = 9.9%. This is exactly the CAGR calculation used on this site for all returns.
Without annualization, it's impossible to compare an ETF held for 3 years with one held for 7 years. Annualized return puts everything on a level playing field. Be careful though: it assumes steady growth, which hides actual volatility. An ETF can show 10% annualized while having lost 30% in a single year.