Sortino ratio explained

The Sortino ratio is a refinement of the Sharpe ratio. Both measure return per unit of risk — but Sortino counts only downside volatility (the falls), not the upside. That single change answers an objection every investor instinctively feels: why should a fund be called "risky" for going up too fast?

Why that matters

Sharpe penalises a fund for any swing, even big gains. But investors don't mind upside surprises — they only fear losses. Sortino measures return against "bad" volatility only, so it rewards funds that fall less while still rising well. For funds with asymmetric return patterns — small caps that occasionally rocket, or hedged strategies that clip losses — Sortino paints a noticeably fairer picture than Sharpe.

The formula

Sortino = (Fund return − Risk-free rate) ÷ Downside deviation

Downside deviation is computed like standard deviation, but using only the periods where returns fell below a threshold (usually zero or the risk-free rate). Up-months are simply excluded from the risk measure.

A worked example

Imagine a fund returning 16% a year against a 7% risk-free rate. Its overall standard deviation is 18%, but most of that is upside: its downside deviation is only 9%. Its Sharpe is (16 − 7) ÷ 18 = 0.5 — ordinary. Its Sortino is (16 − 7) ÷ 9 = 1.0 — twice as good. The gap tells you the volatility that scared the Sharpe ratio was mostly the pleasant kind. Conversely, if a fund's Sortino is close to its Sharpe, its swings are symmetrical — it falls about as hard as it rises.

How to read it

• Higher is better — more return per unit of downside risk.
• Especially useful for funds with uneven, asymmetric returns.
• Like Sharpe, compare it within the same category and over the same period.

Using Sharpe and Sortino together

If a fund's Sortino is much higher than its Sharpe, most of its volatility is to the upside — a good sign. Between two funds with similar Sharpe ratios, prefer the one with the higher Sortino: it delivered its returns with gentler drawdowns, which matters enormously for whether you actually hold on during a correction. Neither ratio predicts the future, and a fund with a great history can still disappoint — read them as evidence of temperament, not a guarantee. Pair them with rolling returns to see consistency across market cycles.

→ Compare Sharpe and Sortino side by side under "Risk Analysis" on a fund page, or line up two funds in Compare.