What Is MSCI Emerging Markets Index?
The MSCI Emerging Markets Index is a widely recognized benchmark designed to measure the equity market performance of large-cap and mid-cap companies across various emerging markets globally. As a key component of investment management and portfolio theory, this index offers investors a barometer for economic expansion and investment opportunities in economies that are rapidly industrializing and engaging with global capital markets. The MSCI Emerging Markets Index tracks companies in a diverse set of countries, reflecting their collective financial performance and serving as a crucial reference point for funds that aim to capture growth in these dynamic regions.52
History and Origin
The MSCI Emerging Markets Index was first launched in 1988 by Morgan Stanley Capital International (MSCI Inc.). At its inception, the index included companies from just 10 nations, representing less than 1% of the total world market capitalization.50, 51 The concept of "emerging markets" itself was coined earlier in 1981 by Antoine van Agtmael of the International Finance Corporation to stimulate interest in a new equity fund targeting developing economies, a label that subsequently gained significant traction and led to the creation of various indices, including the MSCI Emerging Markets Index.49 Over the decades, as more countries developed and integrated into the global economy, the index expanded its coverage. By 2020, emerging market stocks, as represented by the MSCI Emerging Markets Index, accounted for approximately 13% of the global stock market.48 The index undergoes regular reviews, typically quarterly, with rebalancing conducted semi-annually, to ensure it accurately reflects the evolving landscape of emerging equity markets.46, 47
Key Takeaways
- The MSCI Emerging Markets Index measures the performance of large- and mid-capitalization equities in countries classified as emerging markets.
- It serves as a widely used benchmark for investment funds, including Exchange-Traded Fund (ETF) products and mutual funds, focusing on these regions.45
- The index's composition is weighted by free float-adjusted market capitalization, emphasizing larger, more liquid companies.43, 44
- Countries like China, Taiwan, and Korea often hold significant weight within the index due to the size of their equity markets.41, 42
- Investing in instruments tracking the MSCI Emerging Markets Index offers opportunities for international diversification and exposure to potential long-term growth.39, 40
Formula and Calculation
The MSCI Emerging Markets Index is constructed using a market capitalization-weighted methodology, adjusted for free float. This means that companies with a higher market value and a larger proportion of their shares readily available for public trading (free float) will have a greater influence on the index's performance. The calculation involves summing the free float-adjusted market capitalizations of all constituent securities and dividing by a divisor, similar to how many market indices are calculated. The weighting of each security (i) in the index ( (W_i) ) can be conceptually expressed as:
This approach ensures that the index reflects the performance of the most significant and liquid equities within each country.38 The index is rebalanced quarterly to account for changes in market capitalizations and other factors, maintaining its accuracy as a benchmark for the emerging equity market universe.37
Interpreting the MSCI Emerging Markets Index
Interpreting the MSCI Emerging Markets Index involves understanding its performance as an indicator of the collective health and growth prospects of the included emerging markets. A rising MSCI Emerging Markets Index generally signifies positive economic momentum, strong corporate earnings, and increasing investor confidence in these economies. Conversely, a decline can point to economic slowdowns, geopolitical risks, or market instability within the constituent countries. Investors often look at the index's volatility to assess the risk associated with these markets, as emerging economies can experience more significant price swings compared to developed markets.35, 36 Analyzing the sector breakdown within the index also provides insight into which industries are driving growth or facing challenges in these regions, with sectors like Information Technology, Financials, and Consumer Discretionary often holding substantial weight.33, 34
Hypothetical Example
Consider an investment manager constructing a global portfolio who wishes to gain exposure to the growth potential of developing economies. They decide to allocate a portion of their assets to an Exchange-Traded Fund (ETF) that tracks the MSCI Emerging Markets Index. If the index comprises 1,200 companies and, over a year, the average share price of these companies increases by 10% on a free float-adjusted market capitalization basis, the value of the ETF tracking the index would also rise by approximately 10% (before fees and expenses). This direct correlation allows investors to easily participate in the broad performance of the emerging markets without needing to research and invest in individual stocks.
Practical Applications
The MSCI Emerging Markets Index serves numerous practical applications in the financial world. It is predominantly used by asset managers and institutional investors as a benchmark to measure the performance of their actively managed mutual funds and passive index fund products that invest in emerging markets. For instance, the iShares MSCI Emerging Markets ETF (EEM) is a widely traded fund that seeks to track the investment results of an index composed of large- and mid-capitalization emerging market equities.31, 32 The index also plays a crucial role in strategic asset allocation, helping investors determine the appropriate level of exposure to these growth-oriented economies within their overall portfolio. Furthermore, its composition provides valuable insights into the economic weight and sectorial trends within emerging markets, aiding in global economic analysis and research. The International Monetary Fund (IMF) regularly assesses the growth prospects of emerging markets, often noting their increasing contribution to global GDP and their growing significance in the world economy.28, 29, 30
Limitations and Criticisms
Despite its widespread use, the MSCI Emerging Markets Index faces certain limitations and criticisms. One significant concern is its concentration risk, particularly the heavy weighting towards a few large countries and companies. For example, China, Taiwan, and South Korea often account for a substantial portion of the index's weight, with Chinese stocks alone sometimes making up over 30%.26, 27 This means the index's performance can be disproportionately influenced by the economic and political developments in these dominant nations, potentially undermining the diversification benefits sought by investors in emerging markets.24, 25 Similarly, the index can exhibit sector concentration, with Information Technology and Financials often comprising large segments.22, 23 Critics argue that this market capitalization weighting may lead to a "backward-looking" bias, as it allocates more capital to countries and industries that have already experienced significant growth, potentially under-representing nascent, high-growth opportunities.21 The CAIA Association highlights the extent of this concentration risk, noting that despite having over 1,400 constituents, the top 10 holdings in the MSCI Emerging Markets Index can account for over 23% of its total weight.20
MSCI Emerging Markets Index vs. MSCI World Index
The MSCI Emerging Markets Index and the MSCI World Index are both widely used benchmark indices provided by MSCI Inc., but they track different segments of the global equity market. The fundamental distinction lies in the economic development stage of the countries they cover.
| Feature | MSCI Emerging Markets Index | MSCI World Index |
|---|---|---|
| Country Coverage | Comprises emerging markets (e.g., China, India, Brazil, Taiwan). | Focuses on developed markets (e.g., U.S., Japan, U.K., Eurozone countries).18, 19 |
| Economic Stage | Countries typically characterized by rapid economic growth, industrialization, and evolving financial systems.17 | Countries with well-established economies, advanced infrastructure, and mature financial systems.16 |
| Growth Potential | Often offers higher growth potential but comes with elevated volatility and risk.14, 15 | Generally exhibits more stable, albeit potentially lower, growth compared to emerging markets.12, 13 |
| Composition | As of mid-2025, covers large- and mid-cap companies across 24-27 emerging countries.10, 11 | As of mid-2025, captures large- and mid-cap representation across 23 developed countries.9 |
Investors often confuse the two due to both being global indices from the same provider. However, the MSCI Emerging Markets Index provides targeted exposure to developing economies, aiming for higher growth, while the MSCI World Index offers exposure to established, less volatile economies.8 Diversifying across both can create a balanced global portfolio investment strategy.
FAQs
What countries are included in the MSCI Emerging Markets Index?
The MSCI Emerging Markets Index includes a diverse range of countries such as Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates.7 The exact number and list of countries can vary slightly over time due to reclassifications and methodology updates.
Can individual investors directly invest in the MSCI Emerging Markets Index?
No, individual investors cannot directly invest in an index. An index is a theoretical benchmark that measures the performance of a basket of securities. However, investors can gain exposure to the MSCI Emerging Markets Index by investing in financial products like **Exchange-Traded Fund (ETF)**s or mutual funds that are designed to track the index's performance.6
How often is the MSCI Emerging Markets Index rebalanced?
The MSCI Emerging Markets Index is reviewed four times per year, during February, May, August, and November. The main rebalancing, which involves recalculating the weights of its large-cap and mid-cap constituents, is conducted semi-annually, typically in May and November.4, 5 This ensures the index remains a relevant and accurate reflection of its target equity market.
Why is the MSCI Emerging Markets Index important for diversification?
The MSCI Emerging Markets Index is important for diversification because it offers exposure to economies that may have different economic cycles and growth drivers compared to developed markets. By including emerging markets in a portfolio, investors can potentially reduce overall volatility and enhance long-term returns, as these markets can provide uncorrelated or lower-correlated returns to domestic markets.1, 2, 3