What Is a Total Return Index?
A total return index is a type of equity index that tracks both the capital gains as well as any cash distributions, such as dividends or interest, attributed to the components of the index. A look at an index's total return displays a more accurate representation of the index's performance to shareholders.
By assuming dividends are reinvested, it effectively accounts for those stocks in an index that do not issue dividends and instead reinvest their earnings within the underlying company as retained earnings. A total return index can be contrasted with a price return or nominal index.
Key Takeaways
- A total return index computes the index value based on capital gains plus cash payments such as dividends and interest.
- A total return index, in contrast to a price index, better reflects the actual returns that an investor holding the index components would receive.
- The total return will tend to exceed the nominal return that only accounts for price increases in the assets held.
- Many popular indices compute total return, such as S&P, which produces the S&P 500 Total Return Index (SPTR).
Total Return Indexes Explained
A total return index may be deemed more accurate than other methods that do not account for the activity associated with dividends or distributions, such as those that focus purely on the annual yield.
For example, an investment may show an annual yield of 4% along with an increase in share price of 6%. While the yield is only a partial reflection of the growth experienced, the total return includes both yields and the increased value of the shares to show a growth of 10%. If the same index experienced a 4% loss instead of a 6% gain in share price, the total return would show as 0%.
Example: The S&P 500
The S&P 500 Total Return Index (SPTR) is one example of a total return index. The SPTR is different from the standard S&P Index (SPX), which does not include dividend gains. The total return indexes follow a similar pattern in which many mutual funds operate, where all resulting cash payouts are automatically reinvested back into the fund itself. While most total return indexes refer to equity-based indexes, there are total return indexes for bonds that assume that all coupon payments and redemptions are reinvested through buying more bonds in the index.
Other total return indexes include the Dow Jones Industrials Total Return Index (DJITR) and the Russell 2000 Index.
Differences Between Price Return and Total Return Index Funds
Total returns stand in contrast to price returns, which do not take into account dividends and cash payouts. Including dividends makes a significant difference in the return of the fund, as demonstrated by two of the most prominent.
For instance, theprice return for the SPDR S&P 500 ETF (SPY) since it was introduced in 1993 was789% as of March 10, 2021. The total return price(dividends reinvested), however, is close to 1,400%.The Dow Jones Industrial Average over the 10 years ended in March 2021 had a price return of 162%, while the total return rose to 228%.
Understanding Index Funds
Index funds are a reflection of the index they are based on. For example, an index fund associated with the S&P 500 may have one of each of the securities included in the index, or may include securities that are deemed to be a representative sample of the index’s performance as a whole.
The purpose of an index fund is to mirror the activity, or growth, of the index that functions as its benchmark. In that regard, index funds only require passive management when adjustments need to be made to help the index fund keep pace with its associated index. Due to the lower management requirements, the fees associated with index funds may be lower than those that are more actively managed. Additionally, an index fund may be seen as a lower risk since it provides for an innate level of diversification.
FAQs
A price return index focuses solely on the price changes (capital gains or losses) of the securities within the index. In contrast, a total return index accounts for dividends, interest, rights offerings, and other distributions received during the same period.
What is total return index and price return index? ›
A price return index only considers price movements (capital gains or losses) of the securities that make up the index, while a total return index includes dividends, interest, rights offerings and other distributions realized over a given period of time.
What is total return vs price return? ›
In summary, price return focuses solely on changes in the market price of an asset, while total return provides a measure of the returns you would have achieved from holding the security by considering both price changes and income generated by the asset, giving a more accurate representation of an investor's actual ...
What does S&P 500 total return index mean? ›
Example: The S&P 500
The SPTR is different from the standard S&P Index (SPX), which does not include dividend gains. The total return indexes follow a similar pattern in which many mutual funds operate, where all resulting cash payouts are automatically reinvested back into the fund itself.
What are the benefits of tri vs pri? ›
TRI includes reinvested dividends, offering a comprehensive measure of total returns. PRI only considers price changes in assets, excluding reinvested income. Thus, TRI reflects both capital gains and income reinvestment, while PRI reflects only capital gains.
What is the difference between price index and total return index? ›
A price return index focuses solely on the price changes (capital gains or losses) of the securities within the index. In contrast, a total return index accounts for dividends, interest, rights offerings, and other distributions received during the same period.
What is an example of a total return? ›
For example, if an investor invested $20,000 and receives $25,000 at the end of three years, the investment provided a total return of (25,000 – 20,000) / 20,000 = 0.25 (i.e., 25%). However, it does not consider the period of three years that the investor dedicated to the security.
What does total return mean in ETF? ›
For ETFs and mutual funds, total return includes both the price change of the shares and the assumption that all dividend and capital gain distributions are reinvested. For stocks, it is assumed that dividend payments are reinvested on the ex-dividend date.
What is the difference between price index and performance index? ›
A performance-based index differs from a price index in that performance equals the sum of corporate events and price movement. A price index, on the other hand, considers capital gains or losses of a security without regard for cash disbursem*nts like dividend payments.
What is a good total return on a stock? ›
Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market. However, keep in mind that this is an average. Some years will deliver lower returns -- perhaps even negative returns. Other years will generate significantly higher returns.
What is the difference between total return and today's return? Total return is a measure of the value that an investment has produced since it was added to your portfolio. Today's return only looks at the change in value for the current day, as compared to the closing price on the previous day.
What is the total return index of tri? ›
The total return index (TRI) is a benchmark to determine the actual returns for the underlying assets of a mutual fund. It measures both dividend returns and capital appreciation. It illustrates how dividend payments affect the profits of investors. TRI assumes that all the dividends were reinvested.
What is the difference between net total return index and total return index? ›
I understand that gross total return index reflect price performance plus full value of dividends while net total return index reflects price performance plus net value of dividends assuming a foreign withholding tax rate.
What is the difference between ROI and RI? ›
ROI enables this, because it shows percentages, so can be used to compared returns on divisions of different sizes. By contrast, RI is an absolute measure, which makes it difficult (but not impossible) to compare performance.
How does a total return index work? ›
The total return index (TRI) is a benchmark to determine the actual returns for the underlying assets of a mutual fund. It measures both dividend returns and capital appreciation. It illustrates how dividend payments affect the profits of investors. TRI assumes that all the dividends were reinvested.
What is the difference between total return price and total return NAV? ›
The total return of a fund includes distribution payouts, such as dividends; thus, it includes distribution that's not been reinvested into the fund, whereas net asset value return only includes distributions that are reinvested.
What are the different types of index returns? ›
Price return, total return and excess return are three return types used in insurance indices. These return types serve different purposes and ultimately are one element to consider as part of the overall index construction.
