If investing in index ETFs, what happens to all the dividends? If they are reinvested, shouldn't they give higher returns than the index every year? (And not just track the index)?

To keep this simple. The dividends are actually used to buy more units of the ETF. This also meant you get these additonal units for 'free' and hence, have a higher returns compare to what you had invested.

Yes, depending on the ETF type dividends can be distributed to the investors.

with SP500 ETFs (VOO, IVV) the dividend yield is surprisingly high, good thing!

Nope, the etf will be reinvested to purchase more units, doesnt mean it will get you high returns.

All the answers provided are key reasons that contribute to the lower performance of Index ETF to the Index it’s tracking.

Another reason is because the measurement of performance of Index ETF and Index is by time-weighted return. This form of measurement does not take into account the effect of reinvestment of dividends. Thus, when coupled with the effects of fees etc, Index etf underperform.

However, in reality, you maybe performing better than Index because you are holding more units of the Index etf and this compounds your returns over time.

For example: (exclude fee)

index started at $1

Index returns 10% + 2% dividend

index ends at $1.10

Index ETF started at $1 - you invest $100, 100 units

Index ETF returns 10% + 2% dividend

index etf price $1.10

your holdings = $112.20 $1.10 at 102.2 units.

You will notice that both Index and Index etf will have annual return of 10% which is the figure that they will report. However notice that as an individual, you’re better off with the extra 2.2 units and your return is actually 12.2%. This is just a simple illustration and in reality it is not so clear cut with all the fees involved.

Therefore, when investing always track your own investment using money weighted return (XIRR) and not rely on the fundhouses return.