R-Squared — Mutual Fund Term Explained

How much of a fund's returns are explained by its benchmark. R² of 100 = moves completely with benchmark; 0 = moves independently.

R-squared (R²) indicates what percentage of a fund's return variation is explained by its benchmark index. An R² of 95 means 95% of the fund's movements track the benchmark.

For evaluating alpha and beta, funds with high R² (>85) are more reliably compared against their benchmark.

Related terms

• Beta — A measure of a fund's sensitivity to market movements. Beta of 1 moves with the market; >1 means amplified moves; <1 means dampened moves.
• Alpha — The excess return a fund generates over its benchmark. Positive alpha means the manager added value beyond what the market delivered.
• Benchmark — The market index a fund is compared against. A fund manager must beat the benchmark consistently to justify active management fees.
• Tracking Error — For index funds: how closely the fund tracks its benchmark. Lower is better — high tracking error means the fund deviates from the index.

Browse the full mutual fund glossary, or see this concept in action in the fund screener.