The question
Two funds ended up in about the same place. Were they equally risky? And which numbers tell me?
The idea
- "Risk" is not one thing. A scorecard splits it into three questions, and each needs its own number:How bumpy is the ride? That is volatility: how widely weekly returns swing around their average, stated as a yearly number.How bad did it get? That is the worst fall, or max drawdown: the biggest drop from a high to a later low (Beginner lesson 1).What happens when the market drops? That is downside capture: in the weeks the benchmark fell, how much of that fall the fund took, on average. 100% means it fell just as much; above 100% means more.
- Return tells you where you ended. Risk tells you what you sat through on the way.
Worked example
ARKK is ARK's actively managed innovation fund. VOO tracks the S&P 500. ETFIQ's scorecard measures both over the same 626 weeks, Nov 7, 2014 to Nov 6, 2026, and measures ARKK against VOO. (ARKK is an example, not a pick.)
Start with return. On $10,000 (+314.7% as a decimal is 3.1468):
- ARKK: $10,000 × (1 + 3.1468) = $41,468
- VOO: $10,000 × (1 + 3.4445) = $44,445
Close. The risk numbers are not.
1. Volatility: 37.4% against 16.5%. 37.4 ÷ 16.5 = 2.27. ARKK's typical swing was more than twice as wide. Volatility says how far a fund moves, not which way.
2. Worst fall: −80.1% against −31.8%. Imagine $10,000 invested at each fund's high point:
- ARKK, Feb 12, 2021 to Dec 23, 2022: $10,000 × (1 − 0.8011) = $1,989
- VOO, Feb 14, 2020 to Mar 20, 2020: $10,000 × (1 − 0.3178) = $6,822
Now the step that matters. To get back to $10,000:
- ARKK needs $10,000 ÷ $1,989 = 5.03 times its money, a gain of +403%
- VOO needs $10,000 ÷ $6,822 = 1.47 times, a gain of +47%
A fall and the gain that repairs it are not the same size. The deeper the fall, the faster the repair grows. On Nov 10, 2026, ARKK was still 50.1% below its Feb 2021 high.
3. Downside capture: 140.1%. In the 260 weeks VOO fell, ARKK fell 1.4 times as much on average. If VOO dropped 2% in a week, ARKK typically dropped about 2 × 1.4007 = 2.8.
Its upside capture was 236.0%: in up weeks it rose about 2.4 times as much. Both come from one habit: ARKK moved more than the market both ways.
The common mistake
"Similar returns mean similar risk." ARKK and VOO ended about $3,000 apart on $10,000. But an ARKK holder sat through a fall to $1,989. Many people sell in a fall like that and miss the long-run return.
A second mistake is trusting one risk number. A fund can be calm most weeks and still crash once. Read all three.
Check your understanding
Pick an answer to see why. Two of three right passes the lesson.
1. A fund falls 50% from its high. What gain does it need to get back?Answer: C. 100%. $10,000 falls to $5,000, and $5,000 must double to reach $10,000 again. Not A: a 50% gain on $5,000 only gets you to $7,500.2. A fund's downside capture against its benchmark is 60%. The benchmark falls 5% in a week. Roughly what did the fund do, on average, in weeks like that?Answer: D. Fell 3%. 5% × 60% = 3%. Below 100% means it took less of the fall. Not A: capture under 100% still means falling, just by less.3. Fund X has volatility of 12% and a worst fall of −45%. Fund Y has volatility of 18% and a worst fall of −30%. What is the best reading?Answer: A. X is usually calmer, but had a deeper crash. Volatility measures the usual swing; the worst fall measures the single worst stretch. They can point different ways. Not B: a lower volatility says nothing about how deep one bad fall went.
Takeaways
- Read volatility, worst fall and downside capture together; each answers a different question.
- Turn any worst fall into the gain needed to recover: −50% needs +100%, −80% needs +400%.
- Ask what a holder sat through to earn any return.