The MSCI Index is a measure of stock market performance in a given region. Like other indices such as the Dow Jones and S&P 500, it tracks the performance of the stocks listed in the index.
How does it work?
MSCI identifies stocks for its equity indices that can be easily traded and have high liquidity. The stocks must be actively traded by investors and have no ownership restrictions. MSCI aims to balance accuracy and efficiency. It must include a sufficient number of stocks to represent the underlying stock market. At the same time, it cannot have too many stocks so that ETF and mutual funds can replicate the index.
Each index aggregates the total market value of all its stocks. This is the stock price multiplied by the number of shares outstanding. The S&P 500 uses the same methodology. Market capitalization is calculated in both US dollars and local currency. This gives you an idea of the index’s performance without the impact of exchange rates.
Each index is updated daily from Monday to Friday. Additionally, each index is reviewed quarterly and rebalanced twice a year. This is when its manager adds or removes stocks to ensure that the index still accurately reflects the composition of the underlying stock market it measures.
For this reason, MSCI indices have the potential to move markets. When the index is rebalanced, all ETF and mutual funds that track it must buy and sell the same stocks. Stocks added to the index typically see their prices rise. The opposite happens for stocks that are removed from the index.
What do they measure?
MSCI has indices for a variety of sub-geographies, as well as global indices for stock categories such as small-cap, large-cap, and mid-cap stocks. The four most well-known indices track emerging markets, frontier markets, developed markets excluding the US and Canada, and the world market.
MSCI Emerging Markets Index
The Emerging Markets Index tracks the performance of stock markets in 26 developing countries including Argentina, Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, the Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates. The MSCI Kuwait Index will be included in the MSCI Emerging Markets Index starting November 2020.
In June 2017, MSCI Inc. announced it would add over 200 A-shares. These stocks are listed in Shanghai and Shenzhen and priced in yuan. As a result, all ETFs tracking the MSCI Index were forced to add those stocks.
Saudi Arabia is also included in the GCC Index of countries.
The index aggregates the market value of all listed companies in the stock markets of these countries. It is considered a good measure of stock performance in emerging markets.
MSCI Frontier Markets Index
The Frontier Markets Index tracks stock markets in countries that are more volatile than emerging markets. It was created in 2007. The countries included 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. It also includes the West African Economic and Monetary Union. This consists of the following countries: Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. Currently, MSCI WAEMU indices include securities from Senegal, Côte d’Ivoire, and Burkina Faso.
The following frontier countries have independent municipal indices. They are not included in the Frontier Markets Index: Bosnia and Herzegovina, Botswana, Bulgaria, Iceland, Jamaica, Malta, Palestine, Panama, Trinidad and Tobago, Ukraine, and Zimbabwe.
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Border markets can be very profitable because they have significant growth potential. The main risk is that they trade very lightly. This makes them hard to sell if the economy deteriorates. It also means they can be more easily manipulated by hedge funds. You must understand the countries and their political systems and economic challenges. These countries are susceptible to global shifts in trade and currency and changes in central bank policy.
MSCI EAFE Index
The EAFE index measures developed markets excluding the United States and Canada. EAFE stands for Europe, Australia, and the Far East. It covers 85% of the market value in each of the countries.
The MSCI EAFE Index consists of the following developed 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 performance of large and mid-cap companies that have a global presence. It is cited in financial media to describe the performance of the global stock market. It excludes stocks from emerging markets, so it should be considered a developed world index.
It includes the following countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
The MSCI AC World Index includes all countries in the World and Emerging Markets indices. “AC” stands for “All Countries”.
MSCI History
In 1968, Morgan Stanley published Capital International Indices. These were the first indices for markets outside the United States. The MSCI indices for developed markets were published the following year.
It took nearly 20 years, until 1987, to publish the emerging markets index. In 1996, MSCI published indices for all countries for developing and emerging markets.
On July 2, 1998, MSCI Inc. was established. In addition to indices, it offers risk and return analysis services for various markets. Its competitors include 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., WisdomTree, and Goldman Sachs Asset Management.
In 2007, MSCI launched the Global Islamic Index and factor indices. Since 2010, it has launched several new indices each year.
Source: https://www.thebalancemoney.com/msci-index-what-is-it-and-what-does-it-measure-3305948
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