S&P500 Total Return Index: Reading Market Between the LinesThe 1st half-year of 2023 is near the end, so the June Triple Witch quarterly expiration on the financial markets just took place the business day before.
The S&P500 index ( SP:SPX ) has added 14.44% in net prices since the beginning of 2023 and 15.36% in its total returns ( SP:SPXTR ), back to levels above 4,400 that were not seen in the past 12 months since the second quarter of 2022.
Historical backtest analysis indicates that the result achieved by SP:SPX Index year-to-date is the second largest in the last 25 years, second only to the pre-Covid 2019, where the return of the S&P500 index was 19.12% by mid-June (net prices) and 20.30% (total return).
This publication proposes to dwell in more detail on the definition and formula for calculating so-called market "Total Return", when measuring the performance of financial markets.
As no single idea has been published for the S&P 500 Total Return Index ( SP:SPXTR ) neither on any local version, nor on the International version of the TradingView , to the author's surprise..
So.. Let's be the first 😀
What is Total Return, or "Total Return"?
In general, the Total Return is the actual value (or rate) of profit from investments for a certain evaluation period.
Total return in certain markets includes various categories: accrued interest (accrued interest in bond markets), capital gains (paper P/L based on the change in the market price of an asset), dividends, as well as other mandatory distributions due to regulation, for a certain period of time.
Main conclusions
👉 Total return is the actual return on an investment or basket of investments over a given period of time.
👉 Total return includes interest, capital gains, dividends and distributions, calculated as a percentage of the amount invested.
👉 Total return has a stronger performance vs. Net prices performance, when the amounts that an investor earns on a security over a certain period (in the form of interest, dividends and distributions) are reinvested back into the purchase of additional securities, making higher investment returns over time, according to the principle of compound interest.
👉 Total return are more important when investing in dividend stocks/value investment assets, which have generally low capital appreciation potential relative to Growth assets. But still often outperform them, following a long-term capital reinvestment strategy.
👉 The total return can be formed by the investor both individually, that is through the purchase of additional securities (for the amounts of received interest, dividends and distributions), as well as through mutual and exchange trade funds (ETFs). Of course, bearing in mind and taking into account significant risks, common to all collective investment schemes.
Average annual total return
It is important to analyze the average annual total return for different periods. Comparison of returns against a benchmark of the risk-free rate and inflation shows how efficient or inefficient the issuer of the security has been vs risk-free investments (for example, banking deposits).
When analyzing the average annual total return, it is also important to remember:
👉 Even small discrepancies in the average annual returns on Net prices and Total return prices over time will significantly affect the overall result.
👉 The influence of commissions and exchange fees is also large, despite the fact that they often look like a small amount of a few tenths or hundredths of a percent.
Examples and General Meaning of Net Price Returns and "Total Returns"
👉 At 2.08 percent of the average annual dividend yield of the S&P500 Index over the past 35 years, the return of the corresponding "full return" index SP:SPXTR amounted to 35.98x during this time, while the net price index SP:SPX added only 17.11x, more than 2x down vs yielding of the reinvestment strategy.
👉 Full return reinvestment strategies are important in conditions where financial markets and securities are long-term settling in in wide price (zone) ranges, due to unfavorable or modest general market (macroeconomic) conditions that pushing down stock market and capital growth - for example like in the past 12 - 24 months in SPX as a result of upgoing inflation and Fed interest rates.
