On television, in newspapers, and in online financial news portals, price return indexes get featured prominently. News reports regularly mention how much a particular index has risen or fallen over some duration, and the index used is almost always a price return index instead of a total return index (e.g. S&P 500 price return [SPX] instead of S&P 500 total return [SPXT]). For investors, isn't the total return more relevant than the price return, since the total return includes returns from dividends? In financial news, why is there such a large focus on price return indexes instead of total return indexes?
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1Does this answer your question? Why is there more attention on the S&P 500 than on the S&P 500, inflation adjusted, with dividends?– nanomanDec 29, 2021 at 16:07
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Total Return is not inflation adjusted.– base64Jan 1, 2022 at 11:41
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2 Answers
The news organizations use a simple method of expressing what happened on Wall street today: Dow, S&P 500, and NASDAQ.
An all news radio station where I live gives these numbers 4 times an hour. For the average person that tells them everything they think they need to know about what is happening in the stock market.
Most don't understand what they mean or what they represent but if they go up that means good news, if they go down that is bad news. The numbers seem to react to the financial news (interest rates), Oil prices, inflation, the housing market, unemployment, and major news events.
For investors, isn't the total return more relevant than the price return, since the total return includes returns from dividends? In financial news, why is there such a large focus on price return indexes instead of total return indexes?
Only a small subset of adults care about the difference. The news organizations want a 30 second sound bite, that seems to keep people informed.
In the United States even if they do invest, most people do so via their 401(k) or their IRA. They have no reason to track the different indexes. They have no need for a daily accounting of their investments.
The subset of people that do need to know the difference are using different news sources to track the performance of their investments.
answered Dec 29, 2021 at 11:16
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"The subset of people that do need to know the difference are using different news sources to track the performance of their investments." — What kind of news sources are these people using?– FluxFeb 24, 2022 at 8:52
I agree with you that return indices are more relevant than price indices for most investors, especially in the long term.
Yet, while most price indices are calculated and disseminated quite frequently during the trading hours, most return indices are calculated and disseminated only once a day and after the markets are closed. This is described, for example, by the S&P U.S. Indices Methodology document (also available on this web page on S&P 500 by S&P Dow Jones Indices) as follows:
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.
As the news organizations are able to report only the price versions of most indices during the day, they usually continue to report the price indices and the changes in the price indices even after the markets are closed in order not to confuse their readers or viewers.
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Further, if the news wires were to include dividends, there would be infinite complications due to the ex-dividend date, after-hours trading - e.g., at what minute of the day should a dividend be added to the index?. A clean separation between market price and dividend, for a stock, (like that between market price and coupon, for a bond), makes for clear communication. Dec 30, 2021 at 16:39
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@OrangeCoast-reinstateMonica I agree with you with the clear communication part given how indices are disseminated today but pls note that a stock announced to have a certain date as its ex-dividend date starts trading ex-dividend as soon as the market opens on that day, not at the close. Therefore, the dividend starts affecting the stock and the indices it is part of starting with the opening. It is completely the index provider's preference to calculate and disseminate the return indices only after the markets are closed though this seems to be the convention worldwide for return indices.– AlperJan 6, 2022 at 13:42
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@Alper Why do index providers calculate total return indexes only after the markets are closed, instead of calculating the total return indexes at the open?– FluxJan 10, 2022 at 7:45
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@Flux I think that's because the value of an index is more useful when calculated at daily market closing prices of the underlying stocks rather than at their daily market opening prices. Index returns are mostly used as benchmarks for individual stock or portfolio returns and those returns, especially on a historical basis, are nearly always calculated at daily market closing prices. However, though I have a few estimates as to why, I can't say exactly why the index providers choose to calculate the return indices only once a day.– AlperJan 11, 2022 at 14:25