All about capturing the market’s ups and downs

One key ratio tells the story of any fund

Consistently outperforming the market – that’s the holy grail of investing. We know it’s hard, not many funds do it. Among Canadian-domiciled funds in the U.S. Equity category, over 3-, 5- and 10-year periods, 97%, 95% and 96% of funds have underperformed the S&P 500 (SPIVA Report).

Up- and down-capture ratios, sometimes called up/down market capture ratios, or upside/downside capture ratios, measure how well a fund/ETF did versus an index, like the S&P 500, when the index was up or down. If a fund can outperform, either when the market is up or when the market is down, it has a better chance of outperforming overall. If a fund can outperform when the market is up and when the market is down, it will outperform overall.

Up-capture is calculated by taking the returns of the fund when the index is up, divided by the returns of the index when the index is up. Higher up-capture is better, and if the up-capture is greater than 1, that means that the fund has outperformed the index when the index is up. Sometimes you’ll see it expressed in the 100s, so up-capture over 100 would signal outperformance when the market was up, but the fundamentals of the calculations are the same. For example, if a U.S. equity ETF returned 2.5% in a month, and the S&P 500 returned 2.1%, then the fund has an up-capture of 1.19 for that month.

High up-capture helps reduce number-one investing risk

We know outperformance is good, and a high up-capture is key in reducing the number-one risk we face when investing for retirement, longevity risk – the risk that we will outlive our savings. I go through a little bit more about longevity risk in my previous article here.

An up-capture greater than 1 usually indicates that the fund is taking on some extra risk or extra volatility to achieve returns that are better than the index. This could be achieved by taking on some more volatile asset classes like small cap stocks or adding a little bit of leverage. But it’s okay to take on some extra volatility risk as long as you’re being rewarded with higher returns and reducing longevity risk.

Down-capture is calculated by taking the returns of the fund when the index is down, divided by the returns of the index when the index is down. Lower down-capture is better, and a down-capture less than 1 means that the fund has outperformed the index when the index is down. For instance, if a U.S. equity ETF returned -2% in a month and the index return was -2.5%, then the fund had a down-capture of 0.8 for that month. 

A down-capture less than 1 usually means that the fund is taking a conservative approach and is designed such that protecting downside is a higher priority than achieving high returns. This can be achieved by adding some fixed income, gold, or any other asset class that can offset some losses in the equity markets. Keeping down capture under 1 can also reduce longevity risk as long as the upside isn’t being sacrificed too much.

That brings us back to the holy grail of investing: an up-capture over 1 and a down-capture less than 1. On average over the past 5 years, mutual funds and ETFs in the Canadian Equity category have an up-capture of 0.91 and a down-capture of 0.89, so funds are generally capturing less upside than the S&P/TSX Composite, but also less downside. In the U.S. Equity category the average up-capture is 0.91, and the average down-capture is 1.00. Most funds cannot produce an up-capture greater than 1 and a down-capture less than 1.

Reid Baker, CERA, ASA, is the founder and CEO of ForAll Investment Research. He created the ForAll Core & More U.S. Equity Index, which is tracked by the ForAll Core & More U.S. Equity Index ETF (FORU).

Notes and Disclaimers

Content copyright © 2025 by ForAll Investment Research Inc. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. This article is used with permission on this website. All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

Image: iStock.com/Aneese