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 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.
What is the difference between price index and total 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 is the difference between NR and TR index? ›
NR - means Net Return. Net Return indices include dividends after the deduction of withholding taxes. TR - means Total Return.
What is the difference between PR and TR index? ›
TOTAL RETURN (%)
As TR includes not just PR, but also cash dividends, the TR index will be always be higher than the PR index, because cash dividends can't be negative.
What is total return index and price return index? ›
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.
What is the difference between price and index? ›
Answer and Explanation:
In addition, prices of goods and services could be raised by the inflation as well, which happens commonly in all economies. The price index is a different extent, which is treated as a measurement of change in the price level of a set of selected goods and services within a specific period.
What is an example of a total return? ›
Understanding Total Return
The total return is expressed as a percentage of the amount invested. For example, a total return of 20% means the security increased by 20% of its original value due to a price increase, distribution of dividends (if a stock), coupons (if a bond), or capital gains (if a fund).
What is the difference between price and return? ›
A return is the change in price of an asset, investment, or project over time, which may be represented in terms of price change or percentage change.
How is the total return index calculated? ›
What is Total Return Index?
- Key Highlights.
- Step 1: Divide the dividends paid by the base cap of the index. Base cap is used to find the points of an index. ...
- Step 2: Next adjust the price return index for a given day. ...
- Step 3: Apply the modifications made to the price return index to the total return index.
NR—Net Return indicates that this series approximates the minimum possible dividend reinvestment.
What is the difference between PR and TR Morningstar? ›
TR: Represents Total Return. PR: Represents Price Return.
What is a PR index? ›
A Process Performance Index. A measure of the percentage of the tolerance actually used by the sample. Smaller numbers are best. Pr=1/Pp.
What is the difference between total return and price return? ›
The price return typically captures the capital gain or loss without coupons or dividends. By comparison, the total return captures both the capital gains and the income generated from coupons and dividends.
What is TR or PR? ›
TR, short for temporary residence, means living in Canada on a temporary permit before transitioning to permanent resident status after a year or more. PR, short for permanent residence, is an immigration status that gives the holder the right to live permanently in Canada.
What is PR and TR? ›
TR referes to Temporary Visa, whereas PR refers to Permanent Visa.
What is the difference between PRI and Tri? ›
Total Return Index (TRI)
The TRI tracks capital appreciation as well as cash distributions such as dividends and interest. In comparison to PRI, TRI more transparently reflects the returns generated by an investor by holding their investment.
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 are the three types of price indexes? ›
The main ones are as follows: Consumer Price Index (CPI), Producer Price Index (PPI) and Gross Domestic Product (GDP) Deflator. The percent change in a price index, such as the CPI or the GDP deflator, is used to calculate the inflation rate.
What is the key difference between WPI and CPI? ›
WPI and CPI are both inflation measures that track price changes over time. The main difference between the two is the basket of goods they measure. WPI measures the average price level of goods sold in wholesale markets, while CPI measures the average price level of goods and services purchased by households.
