Definition
CAGR is the constant annual compound growth rate that would connect an investment's starting value with its ending value. It summarizes growth over a stated period. It does not describe how smoothly the investment grew or the loss an investor might have experienced along the way.
CAGR formula and calculation
CAGR = (ending value / starting value) ^ (1 / elapsed years) - 1
Use positive starting and ending portfolio values and the actual elapsed time. The formula assumes the values represent a comparable investment without external deposits or withdrawals. If cash flows occur, a time-weighted return series or a money-weighted calculation answers a different question and may be more appropriate.
For a dated return series, chain the periodic returns into an equity curve, then annualize its start-to-end growth. A cumulative return and a CAGR are different quantities: the first reports total growth, while the second accounts for the time taken. Arithmetic mean return also differs from CAGR because compounding is affected by the sequence of gains and losses.
A real U.S. comparison
The U.S. strategy comparison reports the following over May 2, 2016 to October 26, 2026, with dividend-adjusted passive benchmarks:
| Portfolio | CAGR | Maximum drawdown |
|---|---|---|
| QQQ buy and hold | 20.7% | -35.1% |
| SPY buy and hold | 15.1% | -33.7% |
| Momentum-based ETF system | 29.9% | -21.1% |
The active system uses leveraged ETFs and a regime rule. Its higher CAGR cannot be interpreted without those exposures, costs and drawdowns. The source's headline U.S. simulation uses zero commission and tax; its separate cost check adds trading friction. Keep those conventions when comparing it with another result.
Read CAGR in a FinLab report
A completed backtest exposes the statistic as report.get_stats()['cagr']. The return is a decimal, so percentage formatting multiplies it by 100. Save and inspect the full report as well as this single number. The backtesting guide explains the portfolio workflow and the algorithmic trading guide supplies a small Python example.
Common pitfalls
A different start date creates a different CAGR even for the same ETF. Comparing a price-only series with a dividend-adjusted series can also create an apparent advantage unrelated to the trading rule. Costs and withdrawals must be treated consistently.
CAGR contains no measure of volatility or drawdown. Pair it with Sharpe and max drawdown, and inspect the equity path before deciding whether the growth rate fits the portfolio objective.
Frequently asked questions
Is CAGR the return earned every year?
No. It is a constant-rate summary of total compounded growth. Individual years can have very different returns, including losses.
Can CAGR be negative?
Yes, when the ending value is below the starting value and the positive-value formula is defined. A zero or negative equity value needs separate treatment; the standard growth-rate formula is not a general insolvency model.
Related terms and research
See win rate, turnover, the quant glossary and the quant trading guide. The linked U.S. comparison supplies the dated numerical evidence used here.
For education and research only. This is not investment advice. Historical performance does not guarantee future results.
Last updated: 2026-10. Author: FinLab Quant Research.