While ETF assets have grown in leaps and bounds in recent years, education still remains a key part of the space’s development. Many investors are still familiarizing themselves with ETFs’ tax advantages and transparency. Whether looking at ETFs, or mutual funds, or almost any security, however, understanding the difference between total return and price return matters. That distinction may be clear to many veteran investors, but newer ones may want to take a closer look to better understand ETF performance.
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Simply put, when investors take a look at ETF performance, they can read that data in a variety of ways. One can measure a return as a percentage increase for an investment, from the first day of investment on. However, that can miss out on more than a few key pieces of information.
Focusing simply on the yield of an investment can miss out on the benefits of income from, e.g., dividends. Say an investor purchases a share from Acme at $100 and the price rises to $125 — a whopping 25% increase! That firm may also offer dividends, which can add to a so-called total return measure.
Total Return and ETF Performance
Not only dividends, but also interest play a role. Perhaps most important here, however, is how total return also accounts for capital gains. Rather than simply comparing price at investment to price at a later date, total return accounts for those other sources of income. Per Investopedia, a “total return index … tracks both the capital gains as well as any cash distributions, such as dividends or interest, attributed to the components of the index.”
Consider, for example, the KraneShares China Internet and Covered Call Strategy ETF (KLIP). The strategy has returned 6.36% against its net asset value over the last year, per KraneShares data. When looking at its total return, however, one sees a different picture. Per YCharts data, the strategy has returned 13.1% on a total return basis in that time.
The strategy has done so by largely investing in a separate China internet ETF and then layering a covered call strategy on top. Its use of FLEX options provides additional income that doesn’t always get counted in return metrics. When it comes to ETF performance, it can pay to take a closer look.
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