ETF returns are compounded? Able to explain how does this works?

The returns persay is not compounded. It is principal is compounded since the returns are laid across the principal and accrued interests across the years.

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So your $1 gets 10% interest in the 1st year. Becoming $1.10. The next year your new balance $1.10 gets 10% interest in the 2nd year. Becoming $1.21.

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Compared to a simple interest model. You only earn based on the principal. So in a simple interest model. After two years, you earn $1.20.

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So if you put $10000 in a Compounding Interest. You will get $10000*1.1^10= $25937.

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Whereas you would only get $10000(1+0.110) = $20000

Of course, stock and etf price are always compounded~