Understanding "Trailing Total Returns" vs. real returns

Walter Kraslawsky

In the Investing window, I discovered that hovering over a stock symbol offers a link to "Quotes and Charts (online)" which is great! Now I need help understanding what I am looking at.

For example, for USNQX, the display has a "Trailing Total Returns" section showing the 3-year return was 19.14%. So my first guess is that, if I had $10,000 dollars invested 3 years ago, it would be worth $10,000 x 1.1914 ^3 = $16,911 today.

However, the "Morningstar Summary" shows 19.14% was the 3-year pretax return, with a tax-adjusted return of 18.82%. (Yes, I did figure out that (1.1914-1.1882)/1.1914 = the "tax cost ratio" of 0.27%.) So maybe my investment after the funds taxes have been paid would be worth $10,000 x 1.1882 ^3 = $16,775?

Then what does the "potential capital gains" value of 44.13% tell me? Am I paying capital gains taxes on 44.13% of the $6,775 increased value? How much of that is short-term vs. long-term gains?

Finally, the "Overview" section then shows a (10-year?) "total return" of 5.13% and a trailing 12-month yield of 0.52% and an expense ratio of 0.48%. These are VERY different from the "trailing total returns" section 10-year return of 17.79%. So after 10 years would it be worth $10,000 x 1.0513 ^10 = $16,492. Or, after factoring in the tax cost ratio, would it be worth $10,000 x (1.1779*(1-0.27%)) ^10 = $51,205?

Can anybody help me make sense of this? What would my initial $10,000 account really be worth after 3 or 10 years with those USNQX numbers?

Sherlock

It's all well and good to imagine what the gain on $10,000 may have been but I suggest you use the percentages in comparison to other investments.

The Total Return includes interest, dividends, distributions and gain over a period of time.

The potential capital gain is an estimate of the how much a fund's assets have appreciated.  It intended to project future capital gain distributions.

The Total Return in the Overview is since inception (October 26, 2000).    For additional history, you may want to review: https://finance.yahoo.com/quote/USNQX/performance?p=USNQX

Walter Kraslawsky

Thanks Sherlock. I especially appreciate the yahoo link and will save it for future research on varied other funds. And, yes, my comparisons of varied fund percentages led me to drop my S&P500 investments in favor of NASDAQ-100 investments.

But otherwise I failed to be clear that I am trying to calculate, not imagine, what my real return would have been. It’s part of my process for calibrating the spreadsheet formulas in my investment model.

Jim_Harman

I like to use Morningstar's data for funds, as shown here for your example USNQX
https://www.morningstar.com/funds/xnas/usnqx/performance

"Real" return is normally defined as return after inflation, but I don't think that is what you mean here.

3 year trailing total return is the internal rate of return (IRR) for the last 3 years, assuming any distributions were reinvested. It compares today's balance to 3 years ago, assuming no taxes were paid on any distributions or on capital gains if you sold at the end.

When you are comparing returns for different securities and/or different sources, make sure the end date is the same.

Any return quote that includes "after tax" makes some assumptions about the taxes you would pay on distributions and/or capital gains when you sell. You need to research these assumptions and see if they apply to your case.

 

Sherlock

Walter Kraslawsky said:

Thanks Sherlock. I especially appreciate the yahoo link and will save it for future research on varied other funds. And, yes, my comparisons of varied fund percentages led me to drop my S&P500 investments in favor of NASDAQ-100 investments.

But otherwise I failed to be clear that I am trying to calculate, not imagine, what my real return would have been. It’s part of my process for calibrating the spreadsheet formulas in my investment model.

Please define what you mean by: real return would have been.  

Walter Kraslawsky

If I bought 100 shares of a fund priced at $100.00 per share three years ago, and the 3-year trailing total return today is shown to be 10.00%, then I expect the share price to be $133.10 (i.e. $100 x 1.10^3), and my account would be worth 100 x $133.10 = $13,310.

However, if the tax cost ratio for the fund is 0.27%, then I think the real return might be lower by that much; i.e. (1-0.27%) x 1.10 or 9.703 %.

But maybe it is even less -- for example maybe the 0.48% expense ratio further reduces the real return down to (1-0.48%) x 1.09703 or 9.176%. If so then the share price would be $133.10 x 1.09176 ^3 = $130.01 and my 100 shares only worth $13,010.

And that's without considering any calculations involving any of the many other numbers presented on that fund analysis web page. I'm just hoping there is a link to some web site that breaks all of this down for me.

Rocket J Squirrel

Walter Kraslawsky said:

If I bought 100 shares of a fund priced at $100.00 per share three years ago, and the 3-year trailing total return today is shown to be 10.00%, then I expect the share price to be $133.10 (i.e. $100 x 1.10^3), and my account would be worth 100 x $133.10 = $13,310.

I'm unclear on why you're adding the "^3" to the 1.10.

You appear to believe what they're calling "3-year trailing total return" is actually the 3-year annualized return. A 3-year annualized return means the average annual return for 3 years. A 3-year total return means the sum total of the returns over those 3 years.

Jim_Harman

I suggest you study the Glossary entries for Quicken or whatever financial site you are using. For example Morningstar's is here.
http://www.morningstar.com/InvGlossary/

Quicken's glossary is a section in the Help.

investopedia.com also has a good glossary.

Some terms are used inconsistently between sites and some are vague unless used with qualifiers. For example, "Return"  could be dollars, could be a percentage, could be annualized or not and might or might not include distributions. The distributions might or might not be assumed to be reinvested.

Also, to avoid confusing the financial types among us, I suggest you stop saying "real return" when you mean something other than "inflation adjusted return" 

Walter Kraslawsky

Thanks, Rocket. I do indeed trust that the "Trailing Total Returns" shown are annualized returns. Otherwise USNQX wouldn't have even beaten inflation over the last 10 years.

Walter Kraslawsky

Thanks, Jim. I understand, and will drop my incorrect terminology.

Walter Kraslawsky

So, getting back to my question, correcting my terminology, deciding that pretax numbers are good enough for my model, and now using a Yahoo Finance example (thanks to Sherlock), please see https://finance.yahoo.com/quote/QQQ/performance?p=QQQ.

I am comparing the numbers for YTD, 1 year, and 3 years on that page this morning for "Performance Overview" (20.23%, 1.04%, and 17.56%) vs. "Trailing Returns (24.38, 9.25%, and 19.44%), respectively.

So are the differences simply due to variations in begin-end dates? For example, might the 1 year performance overview return of 1.04% be from Aug 28 2018 to Aug 28 2019 vs. perhaps 9.25% trailing return for a standardized date range like July 31 2018 to July 31 2019)?

Jim_Harman

That COULD account for the differences but we have no way of knowing because Yahoo does not say.

Comparing to Morningstar's quote page for QQQ here
https://www.morningstar.com/etfs/xnas/qqq/performance

Yahoo's Performance Overview and Annual Total Return numbers match quite closely to the Morningstar data but Yahoo's "Trailing Returns" numbers appear to be as of 7/31.

If you click on Show interactive chart on the Morningstar page, you can set start and end dates and control whether dividends are included or not. Click on the Display button in the chart and scroll down to select Dividend effect to see the returns including dividends.

I believe that like Quicken, Morningstar's starting price is the closing price for the trading day prior to the selected start date and the ending price is the closing price for the selected end date or yesterday if you picked today and today's closing price is not available yet. 

The percentage change over the selected interval is shown at the top of the chart.