What is the MSCI Emerging Markets Index?
The MSCI Emerging Markets Index is used to measure the stock market performance within emerging countries. Established in the 1960s, It is one of many indexes created by Morgan Stanley Capital International (MSCI). The index captures mid to large-cap companies across over 12 emerging countries. It also represents over 13% of global capitalization.
- The MSCI Emerging Market Index is used to measure the performance of equity markets within emerging countries. It captures mid-cap to large-cap companies in 26 countries across Europe and Asia.
- Investors can purchase the index through the MSCI Emerging Market ETF.
- As of July 2020, there are approximately 1,385 constituents that make up the index, with China, Taiwan, and Korea leading as the top 3 geographies that yield companies that contribute to a substantial portion of the index.
Understanding the MSCI Emerging Markets Index
The MSCI Emerging Markets Index includes companies that span across 26 developing countries. The countries include Argentina, Brazil, Colombia, Egypt, Chile, China, Czech Republic, Greece, India, Hungary, Korea, and Taiwan. In the past, the index originally consisted of 10 countries. Due to its success, the MSCI is often perceived as a performance benchmark for mutual funds.
Investing in the MSCI Emerging Markets Index
The MSCI Emerging Markets Index can be purchased through an investor’s ETF. Generally speaking, emerging markets are known to be a risky investment due to the political and monetary risks that they incur. Investors who intend to invest in the emerging markets will likely face volatile returns.
In theory, with higher risk and volatility, this ETF yields higher returns and potential losses as well – it is dependent on the current economic landscape at that time. In a sense, many investors invest in the emerging markets for diversification purposes, as their current portfolio may be heavily composed of companies or indexes within developed markets such as North American equities.
Identifying an ETF
An exchange-traded fund (ETF) is a financial security that simulates and tracks an underlying index. In other words, an ETF bundles a collection of securities similar to that of any other index and is traded on an exchange, like a stock.
Exchange-traded funds are similar to mutual funds; however, one of the primary exceptions is that they are listed on exchanges and yield significantly lower expense fees. ETFs are capable of bundling multiple types of investments beyond equities – such as commodities, like gold and silver – or a collection of bonds.
Examples of renown ETFs include:
- The SPDR S&P 500 (SPY), which tracks the S&P 500 index
- iShares Russell 2000 (IWM), which tracks the Russell 2000 small-cap index
- SPDR Dow Jones Industrial Average (DIA), which represents the 30 stocks that are held in the Dow Jones Industrial Average
- Invesco QQQ (QQQ), which tracks the Nasdaq 100 – this index focuses on technology stocks
MSCI Emerging Markets Portfolio Composition
As of August 20, 2020, the top 10 MSCI Emerging Market’s holding companies and their respective weighted average include the following:
- Alibaba Group (7.55%)
- Tencent Holdings (5.76%)
- Taiwan Semiconductor Manufacturing – TSM (5.52%)
- Samsung Electronics (3.6%)
- Meituan Dianping (1.63%)
- Reliance Industries (1.25%)
- Naspers Limited (1.18%)
- China Construction Bank Corp (1.13%)
- Pingan Insurance Group (1%)
- com ADR Representing Inc (0.95%)
In terms of geography breakdown, the fund is allocated as mentioned:
- China (40.84%)
- Taiwan (12.53%)
- Korea (11.71%)
- India (8.16%)
- Brazil (4.87%)
- South Africa (3.49%)
- Russian Federation (3.09%)
- Saudi Arabia (2.53%)
- Thailand (1.93%)
- Malaysia (1.69%)
- Mexico (1.67%)
- Indonesia (1.4%)
The five-largest sector distributions are:
- Consumer discretionary (18.33%)
- Financials (18.02%)
- Information Technology (17.66%)
- Communication (12.56%)
- Materials (7.05%)
When the MSCI Emerging Markets Index is Reviewed
The MSCI Emerging Markets Index is re-evaluated and reviewed four times per year – during February, May, August, and November. The reviews are meant to reflect the ongoing changes that occur within the emerging equity markets. Rebalancing is conducted during May and November. During the rebalancing process, both mid and large-cap companies are recalculated.
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