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There's the standard S&P 500 index (SPX) and the rarer used S&P 500 Total Return index (SPTR). If you compare graphs, you'll find that the latter grows faster. Supposedly, SPTR assumes reinvestment of dividends while SPX doesn't.

What does SPX assume you do with your dividends? Put them under the pillow interest-free, or invest them at the risk-free rate? Even SPX must somehow account for dividends, or else each time a company issues a dividend (which is of course accompanied by a drop in stock price), the index would drop.

I assume (but do not know) that ETFs or index funds that claim to track S&P 500 would reinvest dividends, and so I'd expect that their prices would follow SPTR instead of SPX. However, from looking at graphs, the opposite seems to be the case. Obviously I'm missing something.

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The SPX's price is a composite of all of its constituents' prices based upon the S&P 500's weightings.

Dividends are accounted for by the index but not in the price, and nothing about their subsequent investment is assumed, nor does anyone who publishes the price portion report the dividend portion as far as I've seen, but there is an S&P 500 dividend index which seems to be awkwardly accounted, so you might have to reconstruct all of the possible ~500x4+ payments per year or combine those two indexes. On the other hand, a total return does assume total dividend reinvestment tax free (I've also seen that the withholding tax is applied since it provides some sort of floor, but I doubt it), but a total return's dividends will capture future losses as well as gains of the stock where unreinvested dividends could provide a truer yield.

Stocks dropping in price equal to the amount of a dividend paid is a theory not a law.

Some ETFs reinvest, and some do not, instead paying a dividend. It all depends on the index they wish to track and how good they are at doing it. Most are pretty good at tracking their indexes before fees.

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Thanks! How does SPX account for dividends? –  Axel Boldt Dec 27 '13 at 19:15
    
@AxelBoldt I slightly misspoke. Will correct in edit... –  quantycuenta Dec 27 '13 at 22:15
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