Total return is a concept that is surprisingly misunderstood.  We get emails asking why does our moving average not match Yahoo or Tradestation?   

Most Internet data sources and brokerage software platforms don't track total return -- yet total return is how all index returns are stated.  In 2010, the SPDR S&P 500 index fund (SPY) was not +12.8%, it was up 15.1%.  Vanguards investment grade bond fund (VCIT) was not +5.1% in 2010, it was +10.0% (and had some nice tactical swings throughout the year).   The difference was distributions (which come in 2 forms:  dividends and capital gains distributions).  

One common thing we see is for various people to compare their performance to the price-only +12.8% and then footnote it saying 'dividends excluded'?   To us, this is just as bad as mutual funds that claim the expense ratio is 1.2% and then footnote it saying you will be charged a 3% redemption fee if you sell the fund in first 5 years.   There are no hidden fees with ETFs -- no sales loads, no purchase or redemption fees, no 12-b-1 fees.   The 'A-class' 'B-class' 'C-Class' 'H-Class' 'I-class' mutual fund system is non-sensical in the ETF world --- there is only a single class of an ETF.     

 

Here is another one: the Vanguard 60-40 stock-bond balanced fund returned +20.1% for the 10 years ended June 30th, 2011 [1]

[1] excludes dividends

 

Well, a large part of owning a bond in the first place is the coupon.   As it turns out, that index fund (VBINX) was +59.7%  INCLUDING dividends.  So it is entirely disingenuous to compare to a number that is one-third of the actual index return. 

 

 

While this is all obvious to some -- it is clearly still not understood by many.

We created a free Comparison Tool to make it easy to view this concept as we feel the only REAL way to truly understand something fully is to interact with it through an application -- rather than just read about in a paper or on a blog. 

Try a few out.  Be aware that even if its not a large dividend payer, any capital gains distribution will also affect the return.    

Bond ETFs:

IEF

TIP

HYG

LQD

 

Others:

AMJ

RWX

XLU

PPH

 

 

When doing comparisons and analysis, it is obviously important to make sure that data is correct in the first place.    This means consistency.   Below are a sampling of 1-day performance for ETFs that had distributions today (June 1, 2011).  Note that TIP (iShares TIPS ETF) had a nearly 1% distribution today ($1.04 was taken out of the price and the cash will arrive in accounts that hold this security on the payable date:   June 7, 2011).

 

 

Given the markets strong preference for yield this summer -- witness repeated new highs in Corporate Bond Indexes, Preferred Stock Indexes, Master Limited Partnership (MLP) Indexes, High-Yield Bonds, Emerging Market Bonds etc...  we wanted to update some charts to show how the difference between total return and price return works out:

Longer-Term Treasury Bonds (TLT):

Utility Stocks (XLU):

Consumer Staples (XLP):

High-Yield Bonds (HYG):

True leadership in bond ETF segments continues as new 6-month highs today in a number of key bond indexes. You must understand total return in order to properly understand this as price charts through standard websites do not track the total return of the indexes. New 3 & 6-month highs among many major bond ETFs -- here are two:

 

 

ETFreplay continues to work hard on new functionality and will continue to release new products so check back in. In the meantime, we have listened to users requests and have made a number of enhancements such as:

* Much improved printing in the charts and tables (on ETF Charts, note the user 'control' at bottom of page -- a check box option -- to set up page for printing with white background - it prints quite nicely).

* The moving average backtest now has choice of either daily or monthly moving average.

* We have updated the video for the Relative Strength Backtest page

 

If you have any comments or requests, use the Contact Form to send us a message.

 

kind regards,

ETFreplay.com

 

 

The history of the stock market is that dividends make up a material component of equity index returns.  The one exception being the decade of the 1990s, where there was massive P/E expansion that dwarfed the impact of dividends.

But there is a more fundamental point, as long as you are going to invest in something like an ETF, which tracks an underlying index, you might as well use accurate data of the underlying index, which is always TOTAL return. The 'price-only' ETF return found on financial charting websites like yahoo and google can be quite different than the underlying index TOTAL return.

Emerging Market Bond Index:


Pharmaceutical Stock Index:


Preferred Stock Index:


Real-Estate Investment Trust Index:


Investment-Grade Bond Index:


Utility Stock Index:

On the anniversary of the stock market low, these are trailing 12 month examples of how price charts that don't adjust for dividends & distributions are simply inaccurate for professional analysis. The total return for SPDR Junk Bond ETF (JNK) is over 20 percentage points better than its price return -- due to dividends. The Pharmaceuticals HOLDR (PPH) had 1) dividends and 2) a major payout distribution in 2009. If you are not watching total return, you are not getting the right impression in a chart.