It’s time to focus on the full return index

In securities investment, a research misunderstanding that many investors often fall into is that instead of using the full return index as a comparison standard for investment returns, they use ordinary stock indexes. This comparison of the wrong choice of the target will allow investors to get the wrong answer to the question of “whether they beat the index”.

In simple terms, the total return index is an index that includes dividend reinvestment, and the general common stock index does not include dividend reinvestment. Because investors can reinvest the dividends they receive in actual investment, the total return index is more able to reflect the true return that can be obtained from investing in a stock index than the ordinary stock index (especially in mainland China). The market has such a low dividend tax rate and even capital gains tax exemption).

In global equity research, full-return indexes tend to return much more in the long run than ordinary stock indexes. However, in the early years of the A-share market, the difference in returns between the two was not significant. This is mainly caused by several reasons: First, the valuation of A-share markets in the past has often been relatively high, so the dividend rate is low, and it is difficult for the full-income index to generate higher excess returns; The history is relatively short, and the compound interest accumulated by the full return index is not easy to produce large results in a short period of time.

In the past ten years, as the valuation center of the A-share market has continued to move downwards, the dividend rate has continued to rise, and the traceability time has been getting longer and longer, the difference between the total return index and the ordinary index has begun to appear. Therefore, when investors encounter problems such as the calculation of stock index growth, investment returns, and comparison of stock index performance, they need to start paying more attention to the full return index.

Let’s see how the concept of “full income” in the A-share market can bring investors different returns from ordinary stock indexes in the past.

The comparison between the full-income index and the ordinary stock index is the one that most brings about the feeling of differentiation, compared with the comparison between the banking industry index and the GEM index. For a long time, the vast majority of investors’ opinions on the banking industry index and the GEM index are that the latter represents emerging industries and technology, and the former represents the traditional economy. Therefore, the long-term return of the latter is far superior to the former. Indeed, if the long-term returns of the SSE Bank Index and the GEM Index are compared, from May 29, 2012 (this date is the release date of the SSE Bank’s Full Return Index), this date is chosen to maximize the use of historical data while facilitating Comparison of the next full-income index) By January 15, 2020, the GEM index rose from 720 points to 1924 points, an increase of 167%, while the Shanghai Stock Exchange Index rose from 506 points to 882 points, an increase of only 74%.

However, if we look at the comparison of the total return index in the same interval, the gap between the banking industry index and the GEM index will be much smaller. At the same time, the Shanghai Stock Exchange’s Total Return Index rose from 541 points to 1306 points, an increase of 141%, which is nearly double the increase of the Shanghai Securities Banking Industry Index over the same period. In the same period, the GEM Total Return Index rose from 731 points to 2030 points, an increase of 178%, which is only a little more than the SSE Bank’s Full Return Index.

The difference reflected in the above comparison is due to the extremely high dividends of the banking industry compared to other industries and indexes over the years. This difference is also shown in some blue-chip stock indexes with relatively higher dividend payout ratios.

The Shanghai 50 Index is an example. Both the Shanghai 50 index and the Shanghai 50 full-income index were released on January 2, 2004, but in the first many years, the gap between the two was not large. In the eight years from January 2, 2004 to December 31, 2011, the Shanghai 50 Index rose from 1011 to 1618 points, a cumulative increase of 60%, while the Shanghai 50 Total Return Index rose from 1011 to 1825 Points, a cumulative increase of 80%, only 8% more than the former in 8 years. The reason is simple: In these 8 years, the average valuation of the SSE 50 Index is high, and the excess returns brought by the dividend rate are not significant.

However, in the next eight years from December 31, 2011 to January 15, 2020, the SSE 50 Full Yield Index has brought more returns. In these 8 years, the Shanghai 50 Index rose from 1618 to 3058 points, an increase of 89%, while the total return index rose from 1825 to 4338 points, an increase of 138%, which is 49% more than the former, which is the previous 8 years China’s excess return is 20% and a half. The reason is that in these 8 years, the valuation of the SSE 50 Index has decreased and the dividend rate has increased. Therefore, the excess return brought by the full-income index is even more obvious.

However, for stock indexes with low dividends, the full return index is of little significance. Take the CSI 500 Index as an example. Both the index and its full-income index were released on January 15, 2007. From January 15, 2007 to January 15, 2020, in these 13 years, the CSI 500 index rose from 1987 to 5530 points, an increase of 178%, while the total return index rose from 2030 to 6234 points. The increase was 207%, and after just 13 years, it was only 29% more than an index that did not include dividend reinvestment gains.

In many markets other than the mainland market, the full-return index will also make a huge difference in the long run. Taking the Hang Seng Index in the Hong Kong market as an example, in the 15 years from October 11, 2004 to January 15, 2020, the Hang Seng Index rose from 13,305 points to 28,774 points, an increase of 116%. In the same period, the Hang Seng Total Return Index rose from 22767 to 83344, an increase of 266%. Taking into account the 15-year comparison period, this means that from the perspective of arithmetic average, the Hang Seng Total Return Index will give an investor who invests at the end of 2004 an annual average arithmetic return of 10% more.

Because the full-return index, especially the high-dividend stocks’ full-return index, shows different returns from ordinary stock indexes in the long run, and sometimes there are huge differences in returns. Therefore, investors are comparing different types of industries and stock markets. Indexes, or the use of stock indexes as the benchmark for the return on investment of stocks, funds and other products, must fully consider the possible differences caused by the full return index. Do not save time and simply use ordinary stock indexes as the sole criterion for measuring long-term investment returns.

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