In a recent column, you compared the total return of your model portfolio with the total return of the S&P/TSX Composite Index. I am interested in benchmarking my portfolio and would like to know where I can find total returns, in Canadian dollars, for other indexes including the S&P 500 and MSCI EAFE.
Stock indexes such as the S&P/TSX Composite and S&P 500 don’t provide a complete picture of the market’s performance. That’s because they measure price changes but leave out dividends, which are a key component of an investor’s returns.
Total return indexes address this shortcoming by including dividends and assuming they are reinvested in the index. This gives investors a “total” picture of how the index would perform if all dividends were used to buy more shares.
The total return versions of major indexes aren’t as well publicized as their plain-vanilla cousins, but you can find many of the major ones – including the S&P/TSX Composite Total Return Index and S&P 500 Total Return Index – with a search at Investing.com. If you click on “historical data” to find index values for a particular start and end date, you can use these numbers to calculate the total return for the period in question.
For example, according to Investing.com the S&P/TSX Composite Total Return Index (symbol: TRGSPTSE) finished 2019 at 60,460.25, up from 49,203.94 at the end of 2018, representing a total return of about 22.9 per cent last year. This compares with the S&P/TSX Composite Index’s return, from price changes alone, of about 19.1 per cent. So dividends added about 3.8 percentage points to the index’s return.
The S&P 500 Total Return Index (symbol: SPXTR) did even better, gaining 31.5 per cent last year. This compares with a return, from price changes alone, of about 28.9 per cent for the S&P 500.
Calculating the total return of the S&P 500 in Canadian dollars is a little more complicated. One method is to multiply the starting and ending S&P 500 Total Return Index values by the U.S.-Canada exchange rate (in Canadian dollars) in effect on each date. You would then calculate the percentage change in these currency-adjusted index values to get the S&P 500’s total return in Canadian dollars. Using this method, I calculated that the S&P 500’s total return in Canadian dollars was about 25.2 per cent in 2019. (The S&P 500’s total return is lower in Canadian dollars compared with U.S. dollars because the loonie appreciated in 2019.)
Too much work for you? There’s a simpler method. Go to the iShares Canada website and look up the total return of the iShares Core S&P 500 (ticker XUS) exchange-traded fund. Because the ETF trades in Canadian dollars on the Toronto Stock Exchange and is not currency-hedged, it should closely track the performance of the S&P 500 in Canadian dollars. According to iShares Canada, XUS posted a total return of 24.19 per cent in 2019, which is close to the total return I calculated manually above. (The difference could be explained by the ETF’s costs and by slight differences in the exchange rates used.)
Similarly, to find the approximate total return, in Canadian dollars, of the MSCI EAFE index (EAFE stands for Europe, Australasia and the Far East), you could look up the return of the non currency-hedged BMO MSCI EAFE Index ETF (ZEA) on the BMO ETF website at bit.ly/2TVfwB0. According to Bank of Montreal, the ETF posted a total return of 16.1 per cent in 2019.
A few percentage points of additional return in any one year may not seem like a lot, but over many years it can make a huge difference. That’s why it’s important to see the “total” picture including dividends.
Can you explain the difference between traditional dividend reinvestment plans and “hybrid” DRIPs? Which do you employ?
With a traditional DRIP, you enroll your shares directly with the company’s transfer agent. This typically requires you to register the shares in your name, which takes time and could entail a cost of $50 or more. The main advantage of traditional DRIPs is that they allow purchases of partial shares, so every penny of your dividend is reinvested. Hybrid or “synthetic” DRIPs, on the other hand, are operated by your broker. You can set them up with a phone call and there are no fees, but they usually allow purchases of only full shares. So, if a share costs, say, $50, and you are reinvesting $60 of dividends, you will acquire one share and the remaining $10 will sit in cash. If you have only $40 of dividends, you won’t acquire any shares. In my own accounts, and in my model Yield Hog Dividend Growth Portfolio (tgam.ca/dividendportfolio), I don’t use either method. Instead, I let my cash accumulate and then reinvest it manually when I want to add to a position or purchase a new stock.
E-mail your questions to jheinzl@globeandmail.com. I cannot respond to questions personally but I select certain ones to answer in my column.
John Heinzl