Originally Posted by
Muse
A few other thoughts re the gross index / capital index.
American companies are not big dividend payers. Conventional wisdom is they reinvest all of it but that's not necessarily the case - many hoard it on the balance sheet (some have HUGE cash balances) and do a lot of buybacks. Less efficient to pay dividends given they don't have an imputation system and investors have to pay tax on the dividend, while at the same time analysts and instos when valuing a company often ascribe full value to the cash balance when determining their equity value, which would seem a good motivation to not payout more for many companies.
The annual average gross dividend yield on the S&P 500 over the last 10 years was ~1.84%.
The gross dividend yield for the NZX50 over the same period was ~4.8% or about 2.6x higher. Our main index is disproportionately represented by bond proxy type companies like LPTs and generators where investors are looking for and satisfied with dividend income and not necessarily capital growth focused.
Net dividends represented just under half (43%) of the total 8.62% gross index return, and gross dividends represented half the gross index plus imputation index return of 9.71%. So it is entirely worthwhile to at least pay some regard to the gross index given the high yields, given many of the constituent companies are bond proxies / alternatives for fixed securities.
But of course a gross index will outperform a capital one - the capital index is just price movements, the gross includes price movements and dividends. The main mechanical advantage a gross index has is the dividends are reinvested into equities which then reinvest into more equities and compound, pays no transaction fees, and has a slight price gain advantage from reinvested dividends in a bull market (although the inverse is true during a bear market where it has accelerated capital losses from reinvested divies that continue to reduce in value - although very minor).
The NZX is a different place from the 80s so comparing the capital index from then to now is losing some relevance, as it is a dramatically smaller exchange with fewer companies and significantly better controls (note, certainly not perfect). In 1985 alone there were 66 new investment & property companies that IPO'd or backdoor listed and crappy meme stocks were all the rage. Main point the NZX was the wild west in the 80s. It's sort of like comparing the share price of a company that divested its main business decades ago but acquired or transformed into something different (eg SPY). Not saying the NZX is a thriving exchange at all in fact I think its in quite a sorry state. Many solid companies have gotten taken over at opportunistic levels, we've had a serious dearth of quality IPOs, and we still get the dud listings like in 2014 when there was an IPO rush and most were flops (though most never made it into the NZX50) as well as the more recent MFB IPO. Big private companies now prefer to stay private or get taken over by trade rather than list.
The best way IMO to compare the performance of NZX and offshore exchanges is to compare tax adjusted gross indices annualised returns for both. S&P maintains various gross indices for the S&P500 the same way it does for the NZX50. It's the most like for the like we can get, despite some mechanical differences in the level of dividend payout compounding into more equities. It's not surprising the S&P500 gross outperforms the NZX50 gross given the vibrancy of the American economy and our mix of bond proxy companies. It is what it is.
There's a place for both the NZX50 gross and capital indices for the above reasons. I think its particularly important for ETF investors to be mindful of - NZX50 ETFs aren't going to have the gains that offshore indexes will, they will pay a good dividend, but have a lower total shareholder return, if history is any guide.
Just my random thoughts.