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What Is the MSCI Emerging Markets Index?
The MSCI Emerging Markets Index is a key investment opportunity for those looking into fast-growing economies. The index covers mid-cap and large-cap stocks in 25 emerging market countries and gives U.S. investors the option to access it through exchange-traded funds (ETFs) and mutual funds. It’s one of a number of indexes created by MSCI Inc., formerly Morgan Stanley Capital International.
Investing in emerging markets comes with high risks and high reward.
- The MSCI Emerging Markets Index tracks the financial performance of large-cap and mid-cap companies in 25 fast-growing nations.
- Investors can access the index through exchange-traded funds (ETFs) or mutual funds that mirror or benchmark against it.
- The index is heavily weighted in Asian companies, particularly in China, Taiwan, South Korea, and India.
- Emerging market investments are considered high-risk and volatile but offer substantial potential gains.
- The MSCI Emerging Markets Index does not directly invest in stocks; it licenses indexes for use by financial companies to create ETFs.
How the MSCI Emerging Markets Index Measures Emerging Economies
The MSCI Emerging Markets Index reflects the performance of large-cap and medium-cap companies in 25 nations. All are defined as emerging markets. That is, their economies or some sectors of their economies are seen to be rapidly expanding and engaging aggressively with global markets.
The MSCI Emerging Markets Index currently includes the stocks of companies based in Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates.
The index was created in 1988. At that time, companies in only 10 nations were represented. Today, the index is widely used to measure the economic performance of emerging market companies. It is also used by emerging market ETFs and mutual funds as a benchmark against which to measure their own performance.
Important
MSCI offers several indexes, like the MSCI World Index for developed nations and the MSCI All-Country World Index, which covers both developed and emerging nations.
Recent Performance Trends of the MSCI Emerging Markets Index
As of December 2021, the MSC Emerging Markets Index recorded a one-year net return of -2.54%, a five-year annualized return of 9.87%, and a 10-year annualized return of 5.49%. Since its inception on Dec. 29, 2000, it has returned an annualized 8.97%.
By contrast, the MSCI World Index returned 21.82% in one year, 15.03% for the five-year period, and 12.70% for the 10-year period. Since Dec. 29, 2000, it has returned an annualized 6.72%.
The MSCI ACWI Index returned 18.54% in the past year, 14.40% for the five-year period, and 11.85% over 10 years. Its return since Dec. 29, 2000, was 6.68%.
How to Invest in the MSCI Emerging Markets Index
The MSCI Emerging Markets Index is not a fund in itself. Investors can buy shares in exchange-traded funds or mutual funds that buy stocks listed in the index, however.
For example, the iShares MSCI Emerging Markets Index ETF (EEM) invests at least 80% of its assets in stocks and American depositary receipts included in the index. There are several other ETFs that mirror the MSCI Emerging Market Index, but the iShares fund is by far the largest.
There also are funds that do not mirror the MSCI Emerging Markets Index but use it as a benchmark against which to measure their own performance. These include Avantis Emerging Markets Equity ETF (AVEM), Innovator MSCI Emerging Markets Power Buffer ETF January Series (EJAN), and Innovator MSCI Emerging Markets Power Buffer ETF July Series (EJUL).
There are many other choices of emerging market ETFs and emerging market mutual funds that track other indexes, such as the FTSI Emerging Markets Index. These include managed mutual funds that do not mirror an index but do their own stock-picking.
Emerging markets are risky investments due to political risks and currency fluctuations. Investors who turn to emerging markets should expect volatile returns. The potential gains are substantial, and so are the potential losses.
They diversify portfolios that are heavily invested in U.S. assets.
Key Components of the MSCI Emerging Markets Index
As of December 2021, the index reflected the performance of 1,420 constituents across 25 nations. The top 10 were:
- Taiwan Semiconductor Mfg (Taiwan)
- Tencent Holdings (China)
- Samsung Electronics (South Korea)
- Alibaba Group Holding (China)
- Meituan B (China)
- Reliance Industries (India)
- Infosys (India)
- China Construction BK H (China)
- Mediatek Inc (Taiwan)
- JD.Com HK (China)
The index is 32.41% Chinese firms, followed by 16.09% Taiwanese, and over 12% each from South Korea and India.
The index is mostly composed of companies in tech, financial, and consumer discretionary sectors.
Pros
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Provides a simple benchmark for investing in global growth
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Offers a wide view of financial performance in developing economies worldwide
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Focuses on conservative large- and mid-cap companies
Cons
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Not as diversified as other global indexes
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Targets long-term investment horizons, with short- and mid-term returns often lagging
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High on the risk scale due to its focus on emerging markets
MSCI Emerging Markets Index FAQs
Here are the answers to some commonly asked questions about the MSCI Emerging Markets Index.
What Is MSCI Emerging Markets Index?
Like the Dow Jones Industrial Average, the MSCI Emerging Markets Index is a selection of stocks. Each is considered a bellwether in its sector. Collectively, their performance from day to day suggests the overall direction of a market.
In the case of the MSCI Emerging Markets Index, the stocks are selected as representative of the performance of companies in fast-growing developing markets.
Which Countries Are in the MSCI Emerging Markets Index?
The countries and the stocks in the index change from time to time. As of the end of 2021, they include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates.
The index is rebalanced twice a year. At that time, the weighting of any of the 1,400 or so stocks tracked by the index may increase or decrease, or it may be dropped altogether.
What Makes Up the MSCI World Markets Index?
The MSCI World Marks Index tracks the performance of large-cap and mid-cap stocks in 23 developed nations in North America, Western Europe, and the Asia-Pacific region.
Less than 12% of the index was comprised of the stocks in emerging market nations, More than half of the index is made up of U.S. companies.
Is MSCI Owned by Morgan Stanley?
MSCI stands for the investment research firm Morgan Stanley Capital International, now MSCI Inc., which has been a fully independent, stand-alone public company since 2009. There are more than 200,000 MSCI indexes that are used to track the performance of industries, sectors, and regions.
These indexes are used by institutional investors, stock pickers, hedge fund managers, and the media as bellwethers of the performance of the slice of the economy that each tracks.
The indexes also are used as the basis for ETFs, which invest in the stocks listed in the index, proportionally to their weight in the index. Other ETFs do not mirror an index but use it as a benchmark to measure their own performance.
MSCI does not buy the stocks it indexes. It makes money from licensing the indexes to the financial companies that create the ETFs that mirror them.
The Bottom Line
The MSCI Emerging Markets Index is a tool for tracking financial performance of companies in rapidly evolving economies. It represents large-cap and mid-cap stocks in 25 countries, showcasing the significant growth potential in emerging markets. The represented sectors are diverse, particularly in their focus on information technology, financials, and consumer discretionary sectors.
There are risks and rewards associated with investing in emerging markets, underscoring the potential for both significant gains and losses. ETFs and mutual funds that either mirror or use the index as a benchmark cater to different investor preferences and offer various investment opportunities. The MSCI Emerging Markets Index can help diversify a portfolio, especially one that leans heavily towards U.S. assets.
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