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How an ETF reinvests dividends
SPY does not reinvest dividends.  From the SPY prospectus: No Dividend Reinvestment Service  No dividend reinvestment service is   provided by the Trust. Broker-dealers, at their own discretion, may   offer a dividend reinvestment service under which additional Units are   purchased in the secondary market at current market prices. SPY pays out quarterly the dividends it receives (after deducting fees and expenses).  This is typical of ETFs. The SPY prospectus goes on to say: Distributions in cash that are reinvested in additional Units through   a dividend reinvestment service, if offered by an investor’s   broker-dealer, will be taxable dividends to the same extent as if such   dividends had been received in cash.