Stock Index Tracking funds and dividends

zin92

There are several, low-cost, passive funds available which aim to track the performance of (say) the FTSE100 index. The FTSE100 index is a measure of the prices of the 100 stocks in the index. These stocks will pay dividends. When a stock pays a dividend, the price of the stock will fall (other factors excluded) but an investor in the stock will be compensated by receiving the dividend. The FTSE100 index reflects the prices of the underlying stocks but does not measure the dividend income.

In order to match the performance of the FTSE100, the provider of a FTSE100 index-tracking fund will typically buy all of the underlying stocks in the correct ratios (given that there are only 100 of them). Given what I've stated in the previous paragraph, the provider doesn't need the dividend income in order to match the performance of the FTSE100 index. So does that mean that the provider can keep the dividend income for itself whilst still ensuring that the performance of its fund still matches that of the FTSE100 index?

Thanks

Malthusian

Given what I've stated in the previous paragraph, the provider doesn't need the dividend income in order to match the performance of the FTSE100 index.

Yes it does, because the index they're tracking is the FTSE 100 Total Return, not the FTSE 100 Price Return.

If you invest in a tracker fund you get the dividends.

bowlhead99

Here's a link to FTSE's factsheet for the FTSE100 index, showing its total return. https://research.ftserussell.com/Analytics/Factsheets/Home/DownloadSingleIssue?issueName=UKX&IsManual=false

The capital level of the FTSE100 is what you hear about on the daily TV news reports etc, as the dividends are spread out thinly across the year and so from day to day the capital value remains comparable with previous days and with other indexes. But the index of the 'performance' of 100 leading companies is not just about their capital value of course, it is about the total return (measured assuming reinvestment of dividends).

If there was a tracker product which was promoted by its manager as, "we'll invest your money in 100 companies weighted to their market size, charge you a fee for doing so, but whenever those companies pay us an income return, we'll throw those dividends in the bin... or perhaps, spend the money on beer and pizza and fast cars for our team - we are only going to give you the gain or loss in capital value of the 100 companies and not the income from them" - you are right in thinking that one would be mad to invest in such a product.

zin92

Many thanks, I appreciate the clarification.

Regards