Poll: Suppose the U.S. government raised funds w/ a special treasury security that pays a coupon guaranteed to be equal to the aggregate dividend of the S&P 500. Right now, that's ~$14 per quarter, $56 for the year. What price would the treasury security trade at?
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With the bond you suffer a loss of principal when it defaults. With the government security you don’t — the bond is just replaced with another one and the yield is ~unchanged. You have the cash flows without most of the default risk (only the coupon is at risk, not the principal)
Similarly if an equity goes to zero you lose the dividend *and* all your capital, ie you lose all future dividends from that stock. But the hypothetical government security will continue paying dividends since the stock is replaced in the index.
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Even easier way to see it - suppose all the stocks went bankrupt at once. Then the index return is -100%. But the stocks will be replaced with the next biggest 500 stocks at the next rebalance, and will continue paying a dividend - the govt security hardly suffers at all.
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The index would be priced at 0 and would thus pay dividends of $0. The government bond would then also pay out $0. To make it more possible, assume 99% go bankrupt and the remaining 1% are replaced by 500 stocks. The dividend is the yield x (1% x the previous index level).
End of conversation
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