What Is the MSCI Emerging Markets Index?
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What Is the MSCI Emerging Markets Index?

5 Min.

The MSCI Emerging Markets Index is a tool used to assess companies' financial performance in rapidly expanding economies globally. This index monitors mid-cap and large-cap stocks in 25 countries, with its highest holdings currently focused on infotech, economic, and consumer discretionary sectors in Asian and Indian companies. Investors can invest in the index through an ETF that mirrors it or a fund that uses it as a benchmark. It should be noted that all emerging market funds are classified as long-term, high-risk investments with significant potential for gains and losses.

Basics

Within the realm of dynamic economies, the MSCI Emerging Markets Index is a compilation of equities meticulously curated to chart the fiscal trajectory of pivotal corporations within swiftly advancing nations. This assemblage represents a solitary facet within a plethora of indices pioneered by MSCI Inc., previously acknowledged as Morgan Stanley Capital International.

For U.S. investors harboring aspirations of international equity acquisition, a viable avenue exists in the form of an exchange-traded fund (ETF) meticulously mirroring the intricate contours of this index. Additionally, a profusion of ETFs and mutual funds have embraced the MSCI Emerging Markets Index as their performance touchstone, lending depth and perspective to their financial pursuits.

The MSCI Emerging Markets Index: Unveiling Emerging Market Dynamics

Emanating from the core of financial exploration, the MSCI Emerging Markets Index mirrors the feats of significant large-cap and medium-cap enterprises thriving across 25 distinct nations. Each of these nations has secured its identity within emerging markets, characterized by their economies' resolute expansion and resounding resonance within the global markets.

Incorporating large business organizations hailing from diverse landscapes such as 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 MSCI Emerging Markets Index traverses the intricate tapestry of this global economic paradigm.

Traceable back to its inception in 1988, this index once confined its embrace to a mere ten nations. Today, its influence spans far and wide, serving as a beacon to gauge the accomplishments of emerging market entities. Moreover, it constitutes the foundational bedrock upon which emerging market ETFs and mutual funds sculpt their progress.

Within the extensive repertoire of MSCI, other indices align with global equities' cadence. The MSCI World Index meticulously monitors the trajectory of developed nations' stocks. At the same time, the MSCI All-Country World Index casts its net even wider, enshrining a comprehensive selection of stocks spanning both developed and emerging nations.

Performance Analysis of the MSCI Emerging Markets Index

As of December 2021, the one-year net return for the MSCI Emerging Markets Index stood at -2.54%, while the five-year annualized return showcased an impressive 9.87%. Over a decade, the index exhibited a steady 5.49% annualized return. Since its inception on December 29, 2000, it has consistently yielded an annualized return of 8.97%.

In stark juxtaposition, the MSCI World Index presented a contrasting landscape. With a remarkable surge, it manifested a one-year return of 21.82%, followed by 15.03% and 12.70% for the five-year and 10-year periods, respectively. Since its inception on December 29, 2000, this index illustrated a consistent annualized return of 6.72%.

The comprehensive MSCI ACWI Index displayed a resilient performance, reflecting returns of 18.54% over one year, 14.40% over five years, and 11.85% spanning a decade. Since its inception on December 29, 2000, it has accumulated an annualized return of 6.68%.

Navigating Investments in the MSCI Emerging Markets Index

Distinct from a standalone fund, the MSCI Emerging Markets Index allows investors to acquire shares within exchange-traded funds or mutual funds that align with the index's listed stocks. An illustration of this concept is the iShares MSCI Emerging Markets Index ETF (EEM), allocating a minimum of 80% of its assets to stocks and American depositary receipts enshrined within the index. Amidst several ETF counterparts echoing the MSCI Emerging Markets Index, the iShares fund commands a preeminent stature. 

Parallelly, an array of funds elect not to mimic the MSCI Emerging Markets Index yet draw it as a touchstone to evaluate their performance. This category encompasses 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). 

In the broader spectrum, diverse selections of emerging market ETFs and mutual funds trace contrasting indices, like the FTSI Emerging Markets Index. This cohort spans managed mutual funds that abstain from mirroring an index, opting for their distinct stock-selection strategies.

Emerging markets inherently encompass risk, born from political variables and currency oscillations. Ventures into emerging markets demand a braced stance against fluctuating returns. While the prospects for gains hold substantial allure, commensurate risks underscore potential losses. Strategic inclusion of emerging market investments can infuse diversity into portfolios heavily laden with U.S. assets.

Composition and Attributes of the MSCI Emerging Markets Index

By December 2021, the index encompassed 1,420 elements distributed across 25 nations. Leading the chart were:

  1. Taiwan Semiconductor Mfg (Taiwan)
  2. Tencent Holdings (China)
  3. Samsung Electronics (South Korea)
  4. Alibaba Group Holding (China)
  5. Meituan B (China)
  6. Reliance Industries (India)
  7. Infosys (India)
  8. China Construction BK H (China)
  9. Mediatek Inc (Taiwan)
  10. JD.Com HK (China)

Notably, Chinese entities dominated, constituting 32.41% of the index, followed by Taiwan at 16.09%, and South Korea and India both exceeding 12%. The index exuded prominence in information technology, financials, and consumer discretionary sectors. 

Pros

  • Establishes an accessible benchmark for global growth investment tracking
  • Offers a comprehensive overview of developing economies worldwide
  • Puts emphasis on larger and mid-cap companies with a relatively cautious approach

Cons

  • Comparative lack of diversity in contrast to other global indices
  • Oriented towards extensive investment timelines, with short- and mid-term returns occasionally lagging
  • Inherent elevation on the risk spectrum due to its emerging market focus

Conclusion

The MSCI Emerging Markets Index evaluates financial performance in rapidly growing global economies. Monitoring mid-cap and large-cap stocks across 25 nations, it emphasizes Asian and Indian companies in key sectors. Investors engage through mirroring ETFs or benchmarking funds. However, such investments demand long-term commitment and bear substantial risk. The index's intricate components and sector prominence underline its significance in global investments.

MSCI Emerging Markets Index
Exchange-Traded Fund (ETF)
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