what is a total return index 
a total return index is a type of equity index that tracks both the capital gains as well as any cash distributions such as dividends or interest attributed to the components of the index a look at an index s total return displays a more accurate representation of the index s performance to shareholders by assuming dividends are reinvested it effectively accounts for those stocks in an index that do not issue dividends and instead reinvest their earnings within the underlying company as retained earnings a total return index can be contrasted with a price return or nominal index total return indexes explaineda total return index may be deemed more accurate than other methods that do not account for the activity associated with dividends or distributions such as those that focus purely on the annual yield for example an investment may show an annual yield of 4 along with an increase in share price of 6 while the yield is only a partial reflection of the growth experienced the total return includes both yields and the increased value of the shares to show a growth of 10 if the same index experienced a 4 loss instead of a 6 gain in share price the total return would show as 0 example the s p 500the s p 500 total return index sptr is one example of a total return index the sptr is different from the standard s p index spx which does not include dividend gains the total return indexes follow a similar pattern in which many mutual funds operate where all resulting cash payouts are automatically reinvested back into the fund itself while most total return indexes refer to equity based indexes there are total return indexes for bonds that assume that all coupon payments and redemptions are reinvested through buying more bonds in the index other total return indexes include the dow jones industrials total return index djitr and the russell 2000 index differences between price return and total return index fundstotal returns stand in contrast to price returns which do not take into account dividends and cash payouts including dividends makes a significant difference in the return of the fund as demonstrated by two of the most prominent for instance the price return for the spdr s p 500 etf spy since it was introduced in 1993 was 789 as of march 10 2021 the total return price dividends reinvested however is close to 1 400 the dow jones industrial average over the 10 years ended in march 2021 had a price return of 162 while the total return rose to 228 understanding index fundsindex funds are a reflection of the index they are based on for example an index fund associated with the s p 500 may have one of each of the securities included in the index or may include securities that are deemed to be a representative sample of the index s performance as a whole the purpose of an index fund is to mirror the activity or growth of the index that functions as its benchmark in that regard index funds only require passive management when adjustments need to be made to help the index fund keep pace with its associated index due to the lower management requirements the fees associated with index funds may be lower than those that are more actively managed additionally an index fund may be seen as a lower risk since it provides for an innate level of diversification 