How an ETF reinvests dividends
Let me answer by parts: When a company gives dividends, the share price drops by the dividend amount.  Not always by that exact amount for many different reasons (e.g. there are transaction costs if you reinvest, dividend taxes, etc). I have tested that empirically. Now, if all the shareholders choose to reinvest their dividends, will the share price go back up to what it was prior to the dividend? That is an interesting question. The final theoretical price of the company does not need to be that. When a company distributes dividends its liquidity diminish, there is an impact on the balance sheet of the company. If all investors go to the secondary market and reinvest the dividends in the shares, that does not restore the cash in the balance sheet of the company, hence the theoretical real value of the company is different before the dividends. Of course, in practice there is not such a thing as one theoretical value. In reality, if everybody reinvest the dividend, that will put upward pressure over the price of the company and, depending on the depth of the offers, meaning how many orders will counterbalance the upward pressure at the moment, the final price will be determined, which can be higher or lower than before, not necessarily equal. I ask because some efts like SPY automatically reinvest dividends. So what is the effect of this reinvestment on the stock price? Let us see the mechanics of these purchases. When a non distributing ETF receives cash from the dividends of the companies, it takes that cash and reinvest it in the whole basket of stocks that compose the index, not just in the companies that provided the dividends. The net effect of that is a small leverage effect. Let us say you bought one unit of SPY, and during the whole year the shares pay 2% of dividends that are reinvested. At the end of that year, it will be equivalent to having 1.02 units of SPY. 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. The shareholders can't all re-invest their dividends -- it's not possible. Paying a dividend doesn't issue any new shares, so unless some of the existing shareholders sell their shares instead of re-investing, there aren't any shares available for the shareholders to re-invest in.
Without reading the source, from your description it seems that the author believes that this particular company was undervalued in the marketplace. It seems that investors were blinded by a small dividend, without considering the actual value of the company they were owners of. Remember that a shareholder has the right to their proportion of the company's net value, and that amount will be distributed both (a) in the form of dividends and (b) on liquidation of the company.  Theoretically, EPS is an indication of how much value an investor's single share has increased by in the year [of course this is not accurate, because accounting income does not directly correlate with company value increase, but it is a good indicator]. This means in this example that each share had a return of $10, of which the investors only received $1. The remainder sat in the company for further investment. Considering that liquidation may never happen, particularly within the time-frame that a particular investor wants to hold a share, some investors may undervalue share return that does not come in the form of a dividend. This may or may not be legitimate, because if the company reinvests its profits in poorer performing projects, the investors would have been better off getting the dividend immediately. However some value does need to be given to the non-dividend ownership of the company. It seems the author believes that investors failing to consider value of the non-dividend part of the corporation's shares in question led to an undervaluation of the company's shares in the market. One of the often cited advantages of ETFs is that they have a higher   liquidity and that they can be traded at any time during the trading   hours. On the other hand they are often proposed as a simple way to   invest private funds for people that do not want to always keep an eye   on the market, hence the intraday trading is mostly irrelevant for   them. I am pretty sure that this is a subjective idea. The fact is you may buy GOOG, AAPL, F or whatever you wish(ETF as well, such as QQQ, SPY etc.) and keep them for a long time. In both cases, if you do not want to keep an on the market it is ok. Because, if you keep them it is called investment(the idea is collecting dividends etc.), if you are day trading then is it called speculation, because you main goal is to earn by buying and selling, of course you may loose as well. So, you do not care about dividends or owning some percent of the company. As, ETFs are derived instruments, their volatility depends on the volatility of the related shares. I'm wondering whether there are secondary effects that make the   liquidity argument interesting for private investors, despite not   using it themselves. What would these effects be and how do they   impact when compared, for example, to mutual funds? Liquidity(ability to turn cash) could create high volatility which means high risk and high reward. From this point of view mutual funds are more safe. Because, money managers know how to diversify the total portfolio and manage income under any market conditions. Any ETF has expenses, including fees, and those are taken out of the assets of the fund as spelled out in the prospectus.  Typically a fund has dividend income from its holdings, and it deducts the expenses from the that income, and only the net dividend is passed through to the ETF holder.   In the case of QQQ, it certainly will have dividend income as it approximates a large stock index.  The prospectus shows that it will adjust daily the reported Net Asset Value (NAV) to reflect accrued expenses, and the cash to pay them will come from the dividend cash.  (If the dividend does not cover the expenses, the NAV will decline away from the modeled index.) Note that the NAV is not the ETF price found on the exchange, but is the underlying value.  The price tends to track the NAV fairly closely, both because investors don't want to overpay for an ETF or get less than it is worth, and also because large institutions may buy or redeem a large block of shares (to profit) when the price is out of line.  This will bring the price closer to that of the underlying asset (e.g. the NASDAQ 100 for QQQ) which is reflected by the NAV. Keep in mind the ex-dividend date is different from the payable date (the day the dividend is paid). That means the market price will already have adjusted lower due to the dividend. Short answer: you get the lower price when reinvesting. So here's Vanguard's policy, it should be similar to most brokers: When reinvesting dividends, Vanguard Brokerage Services combines the   cash distributions from the accounts of all clients who have requested   reinvestment in the same security, and then uses that combined total   to purchase additional shares of the security in the open market.   Vanguard Brokerage will attempt to purchase the reinvestment shares by   entering a market order at the market opening on the payable date. The   new shares are divided proportionately among the clients' accounts, in   whole and fractional shares rounded to three decimal places. If the   total purchase can't be completed in one trade, clients will receive   shares purchased at the weighted average price paid by Vanguard   Brokerage Services. "Regarding SPY: ""One SPDR unit is valued at approximately 1/10 of the value of the S&P 500. Dividends are distributed quarterly, and are based on the accumulated stock dividends held in trust, less any expenses of the trust.""  (source)  These are depository receipts, not the actual stocks. Regarding IVV: ""The component stocks are weighted according to the total float-adjusted market value of their outstanding shares. The Fund invests in sectors, such as energy, information technology, industrials, financials, consumer staples, healthcare, telecom services, consumer discretionary and materials.""  (more here) VOO is the Vanguard S&P 500 ETF. The tracking error seems pretty small to me.  I went to Google Finance and plotted the percent change for all four on one chart.  They lie pretty much on top of one another.  The actual dollar value of each one doesn't matter nearly as much as the fact that they move up and down almost in lock-step.  There may be a larger difference going farther out, but for three separate financial products, the agreement is still remarkably good." The sum of the dividend yield plus capital growth is called total return. In your examples, you get to a total return of 7% through several different (and theoretically equivalent) paths. That is the right way of thinking. ETFs are legally separate from their issuer, so the money invested should (the lines can get blurry in a massive crisis) be inaccessible to any bankruptcy claims. The funds assets (its shares in S&P500 companies) are held by a custodian who also keeps these assets separate from their own book. That said, if no other institution takes over the SPY funds the custodian will probably liquidate the fund and distribute the proceeds to the ETF holders, this is likely a less than ideal situation for the holders as the S&P500 would probably not be at its highest levels if State Street is going bankrupt (not to mention the potential taxation). I let someone else pick and chose which junk bonds to buy and which to sell. So instead of holding individual bonds in my portfolio I hold an ETF that is managed by a man with a PHD and which buys junk bonds.   I get a yearly 15.5% ROI, paid monthly.  Buy and hold and you can get a good return for the rest of your life. It is only speculation when you sell.