What is the difference between price return and total return?

Price return is the change in an investment's price over a period, and nothing else. Total return adds everything the investment paid out in that time — dividends, interest, fund distributions — as if it had been reinvested. For an investment that pays no income the two are identical. For one that does, the gap widens every year.

The formulas

\text{Price return} = \frac{P_{\text{end}}}{P_{\text{start}}} - 1

\text{Total return} = \frac{P_{\text{end}} + D}{P_{\text{start}}} - 1

where $D$ is the income paid during the period. Over several periods, total return assumes that every payment is reinvested when it is received, so the periods are chained:

\text{Total return} = \prod_{i=1}^{n} \frac{P_i + D_i}{P_{i-1}} - 1

How large the gap gets

Suppose a market rises 5% a year in price and pays out a further 2.5% a year in dividends. In one year the difference is simply the dividend. Over 20 years, with the dividends reinvested every year:

	€10,000 becomes	Per year
Price return	€26,533	5.0%
Total return	€42,479	7.5%

The total return is not just 2.5 points higher each year: the reinvested dividends earn returns of their own. Almost half of the total gain comes from income.

Why it matters in practice

Indices come in both versions. The MSCI World is published as a price index and as a total return index. Germany's DAX is a performance index: its headline value already includes reinvested dividends. Most other major indices, such as the S&P 500 and the EURO STOXX 50, are quoted as price indices.
Comparisons have to match. Comparing a portfolio's total return with a price index flatters the portfolio; comparing a stock's price chart with a total return index understates the stock.
Accumulating and distributing ETFs. An accumulating ETF reinvests its income internally, so its price already shows total return, after the fund's costs. A distributing ETF pays the income out and its price drops by the amount paid, so its chart alone shows only price return.

Gross and net total return

Dividends are often taxed at source before they are paid. A gross total return index reinvests the full dividend; a net total return index reinvests it after a standard withholding tax. Net figures are closer to what a private investor actually receives, and they are the usual benchmark for ETFs.

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