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What Is the MSCI Emerging Markets Index?
Let me explain what the MSCI Emerging Markets Index is—it's a curated selection of stocks designed to track the financial performance of key companies in fast-growing nations. This index is one of several created by MSCI Inc., which was formerly known as Morgan Stanley Capital International.
If you're a U.S. investor looking to get into global stocks, you can buy shares of an exchange-traded fund (ETF) that mirrors this index. You'll also find many ETFs and mutual funds that use the MSCI Emerging Markets Index as a benchmark to gauge their own performance.
Essentially, this index measures the financial performance of companies in fast-growing economies around the world. It tracks mid-cap and large-cap stocks in 25 countries, with top holdings currently concentrated on Asian and Indian companies in the infotech, financial, and consumer discretionary sectors. You can invest in it through an ETF that mirrors it or a fund that benchmarks against it. Remember, all emerging market funds are long-term, high-risk investments with outsized potential for both gains and losses.
Understanding the MSCI Emerging Markets Index
The MSCI Emerging Markets Index reflects the performance of large-cap and medium-cap companies in 25 nations, all classified as emerging markets. These are economies or sectors within them that are rapidly expanding and aggressively engaging with global markets.
Currently, the index includes stocks from 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.
This index was created in 1988, starting with companies from just 10 nations. Today, it's widely used to measure the economic performance of emerging market companies and serves as a benchmark for emerging market ETFs and mutual funds.
MSCI has other indexes tracking global stocks, such as the MSCI World Index for developed nations and the MSCI All-Country World Index for a broad selection across both developed and emerging nations.
MSCI Emerging Markets Index Performance
As of December 2021, the MSCI Emerging Markets Index had 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 delivered an annualized return of 8.97%.
For comparison, the MSCI World Index returned 21.82% in one year, 15.03% over five years, and 12.70% over 10 years, with an annualized return of 6.72% since Dec. 29, 2000.
The MSCI ACWI Index showed returns of 18.54% in the past year, 14.40% over five years, and 11.85% over 10 years, with 6.68% annualized since Dec. 29, 2000.
Investing in the MSCI Emerging Markets Index
The MSCI Emerging Markets Index isn't a fund itself, but you can invest by buying shares in ETFs or mutual funds that hold the stocks listed in it.
For instance, the iShares MSCI Emerging Markets Index ETF (EEM) invests at least 80% of its assets in stocks and American depositary receipts from the index. There are other ETFs that mirror it, but iShares is the largest.
You'll also find funds that don't mirror the index but use it as a benchmark, such as 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 plenty of other emerging market ETFs and mutual funds that track different indexes, like the FTSE Emerging Markets Index, including managed funds that pick their own stocks.
Emerging markets carry risks due to political issues and currency fluctuations, so expect volatile returns. The potential gains are substantial, but so are the losses. They can add diversity to a portfolio that's heavy on U.S. assets.
MSCI Emerging Markets Index Composition
As of December 2021, the index covered 1,420 constituents across 25 nations. The top 10 holdings include 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), and JD.Com HK (China).
Overall, it's heavily weighted toward Chinese firms at 32.41%, followed by Taiwanese at 16.09%, and South Korea and India each over 12%. In terms of sectors, information technology, financials, and consumer discretionary dominate.
Pros and Cons of the MSCI Emerging Markets Index
On the positive side, it offers an easy-to-track benchmark for global growth investing and provides a broad survey of performance in developing economies worldwide, focusing on relatively conservative large and mid-cap companies.
However, it's not as diversified as other global indexes, oriented toward very long-term investment horizons where short- and mid-term returns often lag, and inherently high on the risk scale due to its focus on emerging markets.
MSCI Emerging Markets Index FAQs
What is the MSCI Emerging Markets Index? It's like the Dow Jones Industrial Average—a selection of stocks that are bellwethers in their sectors, collectively indicating the market's direction. For this index, the stocks represent companies in fast-growing developing markets.
Which countries are in it? 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, which may change weightings or drop stocks.
What makes up the MSCI World Markets Index? It tracks large-cap and mid-cap stocks in 23 developed nations in North America, Western Europe, and the Asia-Pacific, with less than 12% from emerging markets and over half from U.S. companies.
Is MSCI owned by Morgan Stanley? MSCI stands for Morgan Stanley Capital International, but it's been a fully independent public company since 2009. It has over 200,000 indexes used by investors and the media as bellwethers. These are licensed to create ETFs, and MSCI makes money from that licensing, not from buying stocks.
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