Price Indexes vs. Total Return Indexes

Article of the week

James Chen (Investopedia): Total Return Index: Definition, Example, Vs. Price Index

Core Ideas

1) Price index: Most stock indexes are price indexes (e.g. S&P 500 Index, Dow Jones Industrial Average Index). They track the changes in the weighted average of the market prices of their constituent stocks.

2) Total return index: Total return stock indexes (e.g. Russel 2000 Index) take into consideration not only the market price changes of the constituent stocks but also the dividends they distribute to shareholders. All cash distributions are accounted for as being reinvested into the index.

3) Dividend fund returns: Dividends represent a significant portion of the total returns shareholders of dividend funds realize.