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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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  • $\begingroup$ Great question, a shame it's not been answered :( $\endgroup$ – Lawrence Wagerfield Oct 15 '16 at 15:47
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Basically the Total Return Index assumes reinvestments compared to "regular" indices.

"A total return index is an index that measures the performance of a group of components by assuming that all cash distributions are reinvested, in addition to tracking the components' price movements.1 While it is common to refer to equity based indices, there are also total return indices for bonds and commodities..."

WIKI

The S&P 500 index just tracks the price-levels of the index itself & assumes no reinvestments such as the Dividend Reinvestment Program (DRIP)

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Vanguard S&P 500 index fund tracks the index and not the total return because it pays dividends out to the owners of the fund... some investors reinvest the dividends, some investors spend their dividends, etc., so, because they cannot control the reinvestment and distribute the dividends, they benchmark against the S&P 500 index and not the total return equivalent

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I believe the exact answer to the question of what the S&P 500 price number assumes you do with the dividends is that you do NOT receive them at all. They are not included in the calculation AFAIK. So, yes, the price of one of the 500 companies drops a bit with a dividend payment (actually on the ex-dividend date), and the index drops a tiny bit because of that.

That is why fund performance is never compared with the S&P price level growth. It is compared with "S&P's performance", which is calculated with dividends of each company reinvested in all of the index companies, and which is tracked by S&P 500 TR.

Funds generally distribute dividends paid, so their price charts will be closer to the price index. Performance numbers and "growth of $10,000" charts include dividend reinvestment.

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Funds that pay dividends hold each companies dividend until the end of the quarter and pay it as a lump sum. Until this is done the fund has lost no value. But when paid drops the value of the payment. You must remember they are continually taking fees out of this amount.

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