What Is Ulcer Index?

The Ulcer Index (UI) is a volatility indicator that measures downside risk by quantifying both the depth and duration of percentage drawdown from previous highs. It was developed by Peter Martin and Byron McCann in 1987 and first published in their 1989 book The Investor’s Guide to Fidelity Funds. The name stems from the idea that sustained price declines cause the kind of stress that gives investors stomach ulcers — making it an intuitive, pain-weighted measure of portfolio suffering.

Unlike standard deviation, which treats upside and downside moves symmetrically, the Ulcer Index focuses exclusively on drawdowns. It is calculated as the square root of the mean of the squared percentage drawdowns from the most recent peak. The squaring effect penalises large drawdowns proportionately more than small ones, so a strategy that suffers a single deep plunge scores far worse than one with many shallow dips of the same cumulative magnitude. This makes the Ulcer Index particularly useful for evaluating long-only portfolios and strategies where investors welcome upside volatility but fear sustained losses.

In practice, the Ulcer Index excels on short track records where the Calmar ratio can be misleading. Because the Calmar ratio depends on a single maximum drawdown event, it can swing dramatically with one additional bad month. The Ulcer Index, by contrast, integrates all drawdown episodes over the measurement window, providing a smoother and more representative picture of the investor’s actual pain. A lower Ulcer Index indicates less drawdown stress. Typical 14-period readings for the S&P 500 range from 2–5 in calm markets to 15+ during crises.

Formula

Percent_Drawdown_i = (Close_i - Max_Close) / Max_Close × 100
Ulcer Index = sqrt( (1/N) × Σ Percent_Drawdown_i² )

where Max_Close is the highest close over the look-back period and N is the number of periods.

Pros

  • Captures both depth and duration of drawdowns in a single number

  • Penalises sustained losses more heavily than brief dips

  • Better suited than the Calmar ratio for short histories where a single max-drawdown event dominates

  • Focuses on downside only, unlike standard deviation

Cons

  • Less widely known than Sharpe or Sortino, so comparing across managers can be harder

  • Sensitive to the look-back window chosen

  • Does not directly account for tail risk beyond drawdown mechanics

Read more on Wikipedia.

Ulcer Index on StockCharts.

Portfolio Charts — Ulcer Index explanation.

See also