MSCI Index: What Is It and What Does It Measure?

msci index
The MSCI tracks stock prices throughout the world. Photo: Biddiboo/Getty Images

Definition: An MSCI Index is a measurement of stock market performance in a particular area. Like other indexes, such as the Dow Jones Averages or the S&P 500, it tracks the performance of the stocks included in the index. 

MSCI stands for Morgan Stanley Capital International, the first global market indexes, created in 1968. MSCI Barra now manages the 160,000 indexes.

MSCI Indexes are used as the base for exchanged traded funds.

That means the ETF duplicates the Index's stock holdings. That allows investors to profit from gains in the Index. 

Similarly, Indexes are also the benchmarks that actively managed mutual funds use as bases. The exchange traded funds follow the MSCI indexes while the mutual funds try to outperform them by picking better stocks.

How It Works

Each MSCI equity index selects stocks that are quickly traded and have high liquidity. They must have active investor participation and are without owner restrictions. The composition of the index seeks to measure the underlying equity market as accurately yet efficiently as possible. In other words, managers want to include as many stocks as needed to represent the equity market, without adding so many that it makes it difficult for ETFs and mutual funds to mimic them. 

Each Index sums up the total value of all stocks' market capitalization. That's  the stock price multiplied by the number of outstanding shares.

The S&P 500, but not the Dow, uses the same methodology. Market caps are calculated in U.S. dollars, and in local currency to give you an idea of how the index is doing without the impact of exchange rates. They are updated daily, Monday through Friday.

Each index is reviewed quarterly and rebalanced twice a year.

That's when its manager adds or subtracts stocks to make sure the index still accurately reflects the composition of the underlying equity market it measures.

For that reason, these indexes have the power to change the market.  When this happens, all the ETFs and mutual funds that track the index must buy and sell the same stocks. Stocks that are added to the index usually find their share prices rising while the opposite happens to stocks that are dropped from an Index.

What Does It Measure?

MSCI has indexes for a variety of geographic sub-areas, as well as global indexes for stock categories such as small-caplarge-cap and mid-cap. Here are the four most popular:

MSCI Emerging Market Index

The Emerging Market index tracks the performance of stock markets in the following 23 developing countries: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.

In June 2015, MSCI Inc. announced it will add so-called China A-shares once "important issues related to market accessibility" are resolved. MSCI is working with the China Securities Regulatory Commission to resolve those problems.

 The China A-shares are those listed in Shanghai and Shenzhen and denominated in yuan. The MSCI China A Index currently tracks those shares.

Once the A-shares are added, expect their prices to rise because many fund managers will follow suit and them to their own funds. All exchange-traded funds that track the MSCI index will be forced to add those shares. It's estimated that $1.7 trillion is invested in all emerging market funds. (Source: Carolyn Cui, "MSCI Call Looms for Chinese Stocks, The Wall Street Journal, June 1, 2015. "Results of MSCI 2015 Market Classification Review," MSCI, June 9, 2015.)

The index compiles the market capitalization of all companies that are listed in these countries' stock markets. The Index is considered a good measurement of the stock performance of emerging markets.

It represents 13 percent of the world's total market capitalization. (Source: "MSCI Emerging Markets Index Overview," MSCI.)

MSCI Frontier Markets Index

The Frontier Markets index tracks the stock markets of countries which are even more volatile than emerging markets. The 26 countries in the Index are: Argentina, Bahrain, Bangladesh, Botswana, Bulgaria, Croatia, Estonia, Jordan, Kazakhstan, Kenya, Kuwait, Lebanon, Lithuania, Mauritius, Morocco, Nigeria, Oman, Pakistan, Palestine, Romania, Serbia, Slovenia, Sri Lanka, Ukraine, Tunisia, and Vietnam. It was created in 2007.

The following frontier countries are in their own standalone country indexes, and aren't included in the MSCI Frontier Market Index: MSCI Bosnia and Herzegovina, MSCI Botswana, MSCI Ghana, MSCI Jamaica,  MSCI Trinidad & Tobago, and MSCI Zimbabwe. MSCI Saudi Arabia is also included in the Gulf Cooperation Council Country Index. 

Frontier markets can also very profitable since they have lots of room for growth. The main risk is that they are very thinly traded. This makes them difficult to sell if the economy deteriorates. It also means they can more easily be manipulated by hedge funds. You really need to understand the countries, their political systems and their economic challenges.Furthermore, these countries very vulnerable to global shifts in trade, currency, and central bank policy changes.

MSCI EAFE Index

The EAFE measures developed markets excluding the United States and Canada. EAFE stands for Europe, Australasia, and the Far East. The MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany,  Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

MSCI World Index 

The World Index measures the market performance of 4,500 large and mid-cap companies that have a global presence. It is often quoted by financial media to describe how the world's stock market is doing. However, it excludes stocks from emerging market countries, so it should be considered a developed world index. The MSCI AC World Index includes emerging markets. "AC" stands for "All Country." (Source: "MSCI Index Definitions,: MSCI.)