The CFAI’s curriculum states that since the index is a price index only and does not include dividends, the synthetic replication strategy can capture only the index performance without the dividends. It also states that the dividend yield is important in the calculations, but the fund does not earn these dividends. Why is that?
I understand that price indexes do not account for dividends. However, from the calculations, we effectively purchase Nf*q / (1 + δ)T shares at the start, and after dividends are reinvested, we have Nf*q shares at the end. Why do the calculations account for dividends but the result only captures the index performance without the dividends? I am confused. I spend V* buying Nf*q / (1 + δ)T shares and end up with Nf*q shares, so apparently I got my dividends? Someone please explain this part for me in a simple way. Thanks in advance.
Stock dividends are included in an Index Fund performance.
Try to buy and hold an Index ETF and you would earn the dividends as well.
You should include a dividend yield in an Index Fund valuation.
To simplify why dividends should be calculated in Index Fund performance, imagine that dividends are just reinvested and are consisted in Index Fund compounded total return.
So because the index does not actually pay dividend, we assume that any dividends received are reinvested into additional shares, and our calculations take into account the dividend yield because of that? The difference between an actual position and a synthetic position is that in an actual position, we receive dividends and can do whatever we want with it, while in a synthetic position, any dividends received can’t be paid out so they are assumed to be reinvested and therefore I end up with additional shares, am I right?