"The BEL 20 is back to where it was 6 months ago." This is a sentence commonly written or uttered in the media. But what "level" are we talking about exactly? In the case of the BEL 20, it is usually a price return, measuring the appreciation or depreciation of the market value of the stocks composing the index. This does not take into account any dividends paid out (and reinvested), which are actually part of the total return of the portfolio.
The "market return" or "price return" measures only the changes in the listed value of a portfolio, ignoring the income generated by the portfolio's assets (dividends for stocks, interest for bonds). In contrast, the "total return" of a portfolio measures its performance by taking into account its market value AND assuming that all distributions made by its constituents are reinvested. The same logic can be applied to indices depending on whether their performance is evaluated solely on the basis of their capitalization or their capitalization and the income from the underlying assets.
In fact, most of the known indices are presented based on their price return. This is the case for the S&P 500, the BEL 20, the Dow Jones, the CAC 40... The German DAX 30 is one of the few indices shows a total return. It is crucial to keep this in mind when reading financial information, because economically speaking, only the total return matters.
If we look at the performance of the S&P 500 - the main index in the USA - and the BEL 20 - the index of the Brussels stock exchange - over the last twenty years, the difference is edifying: in terms of total return, the S&P 500 performs 200% better than the equivalent price index, while the BEL 20 including dividends does 4 times better.
Fund performance can also reflect a market price or total return reality. Indeed, among investment funds, we have on the one hand, the distribution funds which pay a dividend and show a performance that only reflect the evolution of market prices, and, on the other hand, accumulation funds, which reinvest their income and deliver a total return. Trackers, funds that replicate or "track" market indices, can also be distribution or accumulation funds.
Since total return is always higher than market return, judging a manager against a price index is only relevant if the fund he manages distributes its income. An accumulation fund manager that reinvests dividends should mechanically beat the price index and should therefore be compared to the total return of the market, not the price index!
Fortunately, total return data exists for most indices. But unfortunately, it is not easily accessible: only the official index issuers and specialized platforms like Bloomberg or Yahoo Finance offer it, but not for free.
But there is one thing you can be sure of: at easyvest, we invest in accumulation ETFs that track total return indices. This means that our clients get the highest possible performance from an investment in trackers.
For the past 10 years, easyvest's passive investment approach has delivered returns that are virtually unmatched in Belgium. By investing in the equity market over the long term, you potentially benefit from a double growth effect of your portfolio: the increase in the value of the shares held and the systematic reinvestment of the dividends received. It's not magic... but it looks like it!
This article was written when easyvest was authorized and regulated by the FSMA as an agent in banking and investment services. Today, easyvest is a brand of EASYVEST NV/SA, authorized and regulated by the Belgian Financial Services and Markets Authority, with company number BE0631.809.696, as a portfolio management company and as a broker in insurances, with its registered office in Rue Gachard 59, 1050 Brussels, Belgium. Copyright 2023 EASYVEST NV/SA.