Time-weighted vs. money-weighted returns, explained simply

A friend of mine bought XEQT in January of last year. Lump sum. Put in $12,000 on the second trading day of the year and didn’t touch it. By December, the fund was up about 10% for the year, and her account showed roughly $13,200. Clean and simple.

Another friend bought the exact same ETF. Same year. But he invested $1,000 a month, every month, starting in January. By December, he’d also put in $12,000 total. His account was worth about $12,550. He looked at his return and saw something like 4.5%.

Same fund. Same year. Same amount invested. Completely different return numbers. He texted me asking if his brokerage was broken. It wasn’t. He was just seeing a different type of return.

This is not financial advice. I’m explaining the math behind two common return methods so you can make sense of the numbers your brokerage shows you.

Two different questions

There are two main ways to measure investment returns, and they answer two completely different questions.

Time-weighted return asks: “How did the investment perform?”

Money-weighted return asks: “How did my money do?”

They sound like the same question. They are not. And the gap between the two answers can be surprisingly large.

How does time-weighted return work?

Time-weighted return strips out the effect of when you added or withdrew money. It measures the fund’s performance as if you had put everything in on day one and never touched it. Every deposit, every withdrawal, every payday contribution gets mathematically removed.

This is the number that funds and ETFs report. When XEQT says “we returned 10% this year,” that’s a time-weighted return. It’s designed to be fair for comparison. You can line up two funds side by side and see which one performed better, without anyone’s personal deposit schedule muddying the picture.

The trade-off is that it might have nothing to do with your actual experience. You could see a fund report 10% for the year and find that your personal account only grew by 3%. That’s not a mistake. It just means your cash flow pattern (when you put money in, when you took money out) didn’t line up with the fund’s best periods.

How does money-weighted return work?

Money-weighted return (sometimes called XIRR or internal rate of return) does the opposite. It factors in every dollar you added, every dollar you withdrew, and exactly when each of those happened.

If you invested a big chunk right before the market dipped, your money-weighted return will be lower than the fund’s reported return. If you happened to invest heavily right before a rally, it’ll be higher. This number reflects your actual experience as an investor, not the fund’s experience.

It’s personal. Two people holding the same investment can have wildly different money-weighted returns depending entirely on when they moved money around.

A concrete example

Let’s make this tangible.

A fund returns 10% for the year, growing steadily from January to December.

Person A invests $10,000 on January 1. Her money rides the full year of growth. By December 31, she has about $11,000. Her return, whether you measure it time-weighted or money-weighted, is roughly 10%. Both methods agree because she only made one deposit.

Person B invests $1,000 on the first of every month. His first $1,000 gets the full year of growth. His February deposit gets 11 months. His March deposit gets 10 months. His December deposit gets almost no growth at all. By year end, he’s invested $12,000 total and his account is worth about $12,550.

The fund returned 10%. Person B’s money-weighted return is closer to 4.5%. Not because the fund did poorly, but because most of his money simply wasn’t invested for most of the year. His last few thousand dollars barely had time to grow.

If Person B looks at the fund’s reported return and wonders why his account doesn’t match, this is why. The fund is showing time-weighted. His account experience is money-weighted.

Which one should you care about?

Both, for different reasons.

Use time-weighted return to evaluate your investments. Is this fund actually performing well? How does it compare to a benchmark or an alternative? Time-weighted strips away your personal behaviour and lets you judge the investment on its own merits. If you’re deciding whether to keep holding something or switch to something else, this is the number that helps.

Use money-weighted return to understand your actual results. How much money did I actually make? What was my real, lived experience? If you’re trying to figure out whether your overall investing strategy is working (including your contribution timing), money-weighted is the honest answer.

The frustrating part is that most brokerages show one or the other without telling you which. Some show a number that’s unclear even to the people who built the platform. If you’ve ever stared at your brokerage return and felt like the math didn’t add up, now you know why. You might be mentally expecting one method while your brokerage is showing you the other.

Once you see the difference

A lot of investing confusion dissolves once you understand this distinction. “Why don’t my returns match the fund?” Because you’re comparing your money-weighted return to the fund’s time-weighted return. “Why did my friend do better than me in the same ETF?” Because she invested at a different time. “Why does my brokerage show a different number than my spreadsheet?” Probably because they’re using different methods.

Same investment, different return. It’s not a bug. It’s two answers to two different questions.

Once you know which question you’re asking, the right number is easy to find.