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  • Distributing ETFs pay out dividends.
  • Accumulating ETFs retain dividends and reinvest them internally.
  • 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.

What does it mean then that the ETF has the distribution type of income treatment and the Net Total Return index type simultaneously?

The ticker symbol for the exemplary ETF is LYPS PW.

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    Does this answer your question? How can I know if a market index includes dividends yield when calculating its value? (with examples)
    – D Stanley
    Commented May 14, 2021 at 13:00
  • No, it doesn't. It is clear that "First, lets separate two things - the index itself (which is just a number calculated from stock prices) and funds that track the index", but then it tells "If a fund tracks total return, then it does NOT pay out dividends, but reinvests them (presumably in the right proportion to continue tracking the index)". Thus, how is it possible that the fund in my question does pay out dividends, but at the same time it tracks the total return index?
    – Peggy
    Commented May 14, 2021 at 13:12

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According to S&P U.S. Indices Methodology:

S&P Dow Jones Indices calculates multiple return types which vary based on the treatment of regular cash dividends. The classification of regular cash dividends is determined by S&P Dow Jones Indices.

  • Price Return (PR) versions are calculated without adjustments for regular cash dividends.
  • Gross Total Return (TR) versions reinvest regular cash dividends at the close on the ex-date without consideration for withholding taxes.
  • Net Total Return (NTR) versions, if available, reinvest regular cash dividends at the close on the ex-date after the deduction of applicable withholding taxes.

And your question is:

What does it mean then that the ETF has the distribution type of income treatment and the Net Total Return index type simultaneously?

From my understanding, this was what you expected to see:

  • A distributing ETF tracks a Price Return index.
  • An accumulating ETF tracks a Net Total Return index.

And so you got a bit confused when you saw a distributing ETF tracking a Net Total Return index.

However, distributions (dividends) are part of the return from an ETF. If you only look at the Price Return index, you will be understating your gains because you are ignoring the dividends you receive. That is why the benchmark is a Net Total Return index: it includes the effect of ETF price changes, while acknowledging that dividends are part of the return.

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  • Let me try to simplify the answer (hopefully, I correctly understood you): the index type of an ETF designates the ETF's benchmark for the ETF's total return, rather than the ETF's benchmark for the ETF's share price. Is this what you say?
    – Peggy
    Commented May 15, 2021 at 14:50
  • @Peggy I'm not sure I understand your comment. Please do explain. I'm happy to help.
    – Flux
    Commented May 15, 2021 at 15:16
  • My previous understanding was that the index type of an ETF designates that the share price of that ETF will track the selected index. From your explanation I understand that if ETF distributes dividends, then it's share price will NOT track the selected index. Only if you manually reinvest the dividends into the ETF, then your investment will track the selected index (in reality, it won't anyway, due to overheads of transaction costs).
    – Peggy
    Commented May 15, 2021 at 15:28
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    @Peggy Your understanding of my explanation is correct. :-)
    – Flux
    Commented May 15, 2021 at 15:30
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    @Peggy "I understand that if ETF distributes dividends, then it's share price will NOT track the selected index [if that index is a total return index]."
    – Flux
    Commented May 15, 2021 at 15:38

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