MSCI Index and What It Measures
The MSCI Index is a measurement of stock market performance in a particular area. MSCI stands for Morgan Stanley Capital International. MSCI Barra now manages the 160,000 indexes. 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 Indexes are used as the base for exchange-traded funds. 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. Managed mutual funds try to outperform them by picking better stocks.
How They Work
MSCI selects stocks for its equity indexes that are easily traded and have high liquidity. The stocks must have active investor participation and be without owner restrictions. MSCI must balance accuracy and efficiency. It must include enough stocks to represent the underlying equity market. At the same time, it can't have so many stocks that ETFs and mutual funds can't mimic the index.
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 both U.S. dollars and in local currency. That gives you an idea of how the index is doing without the impact of exchange rates.
Each index is updated daily, Monday through Friday. Additionally, 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, MSCI indexes have the power to change the market. When an index is rebalanced, all the ETFs and mutual funds that track it must buy and sell the same stocks. Stocks that are added to the index usually find their share prices rising. The opposite happens to stocks that are dropped from an index.
What They Measure
MSCI has indexes for a variety of geographic sub-areas, as well as global indexes for stock categories such as small-cap, large-cap, and mid-cap. The four most popular track emerging markets, frontier markets, developed markets excluding the United States and Canada, and the world market.
MSCI Emerging Market Index
The Emerging Markets Index tracks the performance of stock markets in the following 26 developing countries: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates. The MSCI Kuwait Index will be included in the MSCI Emerging Markets Index beginning June 2020.
In June 2017, MSCI Inc. announced it was adding China A-shares. Those shares are listed in Shanghai and Shenzhen and denominated in yuan. On June 1, 2018, it named the 200 locally listed Chinese companies it is adding. As a result, all exchange-traded funds that track the MSCI index will be forced to add those shares.
Saudi Arabia is also included in the Gulf Cooperation Council Country Index.
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% of the world's total market capitalization. It's estimated that $1.7 trillion is invested in all emerging market funds.
MSCI Frontier Markets Index
The Frontier Markets Index tracks the stock markets of countries which are even more volatile than emerging markets. It was created in 2007. The 21 countries in the Index are Bahrain, Bangladesh, Croatia, Estonia, Jordan, Kazakhstan, Kenya, Kuwait, Lebanon, Lithuania, Mauritius, Morocco, Nigeria, Oman, Romania, Serbia, Slovenia, Sri Lanka, Tunisia, and Vietnam. That also includes the West African Economic and Monetary Union. It consists of the following countries: Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal, and Togo. Currently, the MSCI WAEMU Indexes include securities classified in Senegal, Ivory Coast and Burkina Faso.
The following 11 frontier countries are in their own standalone country indexes. They aren't included in the Frontier Market Index: Bosnia and Herzegovina, Botswana, Bulgaria, Iceland, Jamaica, Malta, Palestine, Panama, Trinidad & Tobago, Ukraine, and Zimbabwe.
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 need to understand the countries, their political systems, and their economic challenges. These countries are vulnerable to global shifts in trade, currency, and central bank policy changes.
MSCI EAFE Index
The EAFE Index measures developed markets excluding the United States and Canada. EAFE stands for Europe, Australasia, and the Far East. It covers 85% of the market capitalization in each of the countries.
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. It excludes stocks from emerging market countries, so it should be considered a developed world index.
It includes the following 23 countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom, and the United States.
The MSCI AC World Index includes all the countries in the World and Emerging Markets Indexes. "AC" stands for "All Country."
In 1968, Morgan Stanley published the Capital International Indexes. These were the first indexes for markets outside of the United States. The MSCI Developed Market Indexes were published the following year.
It took almost 20 years, until 1987, for the Emerging Markets Index to be published. In 1996, MSCI published the All Country Indexes for developing markets and emerging markets.
On July 2, 1998, MSCI Inc. was incorporated. In addition to the indexes, it provides services that analyze risk and return for various markets. Its competitors are Axioma Inc., BlackRock Solutions, Bloomberg Finance L.P., CME Group Inc., CME Group Services LLC, FactSet Research Systems Inc., London Stock Exchange Group PLC, S&P Global Inc., and WisdomTree and Goldman Sachs Asset Management.
In 2007, MSCI launched the Global Islamic Index and the Factor Indexes. Since 2010, it has launched several new indexes each year.