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MSCI Emerging Markets Index

The Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index is a financial instrument designed to quantify the relative strength of the premier equities offerings available in developing economies. Similar to more traditional indices such as the Dow Jones Industrial Average, S&P 500, or FTSE 100, the MSCI EM Index tracks the performance of select mid and large-cap stocks.

The MSCI EM Index is calculated in accordance with a free-float weighted market capitalisation methodology. This means that individual stocks are assigned a specific proportion of index valuations in relation to the size of their respective market capitalisation. In total, 24 developing economies are included in the index's derivation, representing a broad spectrum of geographic regions.[1]

Historical Background: MSCI And The MSCI Emerging Markets Index

A global household name in finance, MSCI has developed index products and advanced analytics to aid the achievement of investment goals for more than 40 years. Upon becoming officially incorporated in 1998, only two shareholders initially held stock in MSCI: Morgan Stanley and Capital Group International. This arrangement remained in place until MSCI became a fully independent public company in 2009.[2]

Products developed by MSCI include a suite of equities indices aimed at helping investors diversify holdings into markets around the world. The MSCI EM Index is the flagship offering from this line of securities, which also features the popular MSCI World, MSCI ACWI, MSCI Frontier Markets and various MSCI Standalone Market Indices.[3]

In the aggregate, MSCI offers a vast array of unique indices and more than 190,000 in total.[1] When taken together, more than US$9.5 trillion in assets are benchmarked by MSCI index products.[5]

Launched on 1 January 2001, the MSCI EM Index was designed to capture and deliver the growth potential of developing nations to investors around the globe. Since its inception, the MSCI EM has produced an average annualised return of 9.33%,[6] outperforming other primary indices such as the MSCI ACWI and MSCI World. As of year end 2017, assets assigned to the MSCI EM represented an aggregate market capitalisation of more than US$1.9 trillion.[7]


MSCI Emerging Markets Index Composition

Consisting of listings from 24 individual emerging market countries, the MSCI EM Index represents nations in the Americas, Europe, Middle East, Africa and Asia. Approximately 85% of each country's equity market capitalisation is included and features a total of 1,136 mid and large-cap companies.

The following are the leading domestic equities markets included in the MSCI EM Index:[6]

Country Index Weight
China 30.94%
South Korea 14.76%
Taiwan 12.25%
India 9.32%
South Africa 6.26%
Other 26.47%

A significant portion of the index's valuation is dependent upon Chinese stocks. This is highlighted by the inclusion of 234 China A-Shares companies added to the index derivation in May 2018.[8]

Leading Chinese large-cap stocks the Commercial Bank of China, China Construction Bank and oil monolith PetroChina highlight the A-Shares constituents.

The following are the top five companies in terms of market capitalisation included in the MSCI EM Index:[6]

Company Country Market Capitalisation
Tencent Holdings LI China US$246.90 billion
Samsung Korea US$209.55 billion
Taiwan Semiconductor MFG Taiwan US$205.32 billion
Alibaba Group China US$202.36 billion
Naspers South Africa US$97.78 billion

A diverse array of industrial sectors are included in the MSCI EM Index. The following are the sector weights that comprise the index as a whole:[6]

Sector Index Weight
Information Technology 27.64%
Finance 22.98%
Consumer Discretionary 9.27%
Materials 7.81%
Energy 7.65%
Consumer Staples 6.54%
Industrials 5.17%
Telecommunication Services 4.37%
Health Care 3.14%
Real Estate 3.0%
Utilities 2.43%

As the data shows, nearly half of the aggregate value of the MSCI EM Index is tied to the technology and financial sectors. In addition, manufacturing, energy and agricultural corporate interests play a vital role in the performance of the MSCI EM.

Trading The MSCI Emerging Markets Index

Aside from direct investiture, the MSCI EM serves as the basis for mutual funds, exchange traded funds (ETFs), futures and options contracts. In addition, it is featured on leading markets and exchanges around the world including the NASDAQ, Intercontinental Exchange (ICE) and the Eurex.

Traders and investors may engage the MSCI EM Index via many unique methods. From derivatives to traditional managed equity funds, the index may be utilised in any number of ways depending upon location and brokerage service. A few of the most commonly traded products are listed below:

Product Symbol Exchange
iShares MSCI Emerging Markets ETF EEM NASDAQ
iShares Core MSCI Emerging Markets ETF IEMG NASDAQ
MSCI Emerging Markets Index Futures MME ICE
MSCI Emerging Markets Index Futures FMEM Eurex
Options On MSCI Emerging Markets Index MXEF CBOE

Summary

The MSCI EM Index is one of the premier methods of participating in the equities markets of developing economies. However, emerging markets face a variety of issues that may impact performance including regulatory hurdles and geopolitical factors. It is due to the relative instability of both the political and economic structure of these nations that enhanced volatility faces domestic equities listings.

The MSCI EM exhibits this periodic volatility, as illustrated by a large 37.28% gain for 2017[10] and a subsequent loss of 20% through the first half of 2018.[11]

While not for every investor, the MSCI EM provides an opportunity to speculate or diversify using the enhanced risk profile of developing economies. Given an ideal set of objectives and resources, the MSCI EM Index may serve as a suitable investment vehicle.