MSCI Emerging Markets Index
MSCI Emerging Markets Index (MSCI EM Index) is a global stock market index that measures the performance of large-capitalization and mid-capitalization companies across emerging market economies. Developed and maintained by MSCI Inc., the index is one of the world's most widely followed benchmarks for emerging market equities and is extensively used by institutional investors, exchange-traded funds (ETFs), index funds, pension funds, sovereign wealth funds, and asset managers for portfolio benchmarking, passive investing, and international asset allocation.
The MSCI Emerging Markets Index represents the investable equity opportunity set within countries classified by MSCI as emerging markets. It includes companies listed on stock exchanges in multiple developing economies and is constructed using a free-float market capitalization-weighted methodology. Constituents are selected according to transparent criteria that consider market capitalization, liquidity, free-float, foreign ownership accessibility, and overall investability.
Since its introduction, the MSCI Emerging Markets Index has become the principal benchmark for international emerging market equity investing. It serves as the underlying benchmark for numerous investment products and provides investors with diversified exposure to economies experiencing relatively rapid economic growth, industrialization, financial market development, and increasing integration with the global economy.
Because the composition of emerging markets evolves over time, the index undergoes periodic reviews to reflect changes in market accessibility, country classification, corporate actions, and developments within constituent companies. As a result, the index provides a dynamic representation of the global emerging equity market.
History
The origins of the MSCI Emerging Markets Index can be traced to the expansion of international equity investing during the late twentieth century. As developing economies liberalized their financial markets and attracted greater foreign investment, demand increased for benchmark indices that accurately measured the performance of emerging market equities.
MSCI introduced the Emerging Markets Index in 1988 to provide investors with a standardized benchmark covering developing equity markets. Initially, the index included a relatively small number of countries and constituent companies, reflecting the limited accessibility and size of emerging capital markets at the time.
Over subsequent decades, the index expanded substantially as additional countries opened their financial markets to international investors and domestic stock exchanges matured. Improvements in market infrastructure, regulatory frameworks, corporate governance, and trading systems contributed to broader representation across Asia, Latin America, Europe, the Middle East, and Africa.
Today, the MSCI Emerging Markets Index is among the most influential global equity benchmarks and serves as the reference index for a significant proportion of international emerging market investment assets.
Objectives
The principal objectives of the MSCI Emerging Markets Index are to:
- measure the performance of emerging equity markets;
- provide a standardized international benchmark;
- facilitate passive investment strategies;
- support global asset allocation;
- improve international market comparability;
- represent the investable emerging market universe.
These objectives contribute to consistent evaluation of emerging market equity performance.
Methodology
The MSCI Emerging Markets Index employs a free-float market capitalization-weighted methodology.
Each constituent's weight is determined by its free-float-adjusted market capitalization rather than its total outstanding shares. Shares held by governments, founders, controlling shareholders, and other strategic investors that are not readily available for public trading are generally excluded through the application of a free-float adjustment factor.
The adjusted market capitalization is calculated as:
where:
- is the market price per share;
- is the number of outstanding shares;
- is the free-float adjustment factor.
Constituent weights are determined using these adjusted market capitalizations.
Country classification
MSCI classifies equity markets according to objective criteria relating to economic development, market accessibility, and investment conditions.
Countries included in the MSCI Emerging Markets Index generally satisfy requirements relating to:
- market accessibility;
- openness to foreign investment;
- operational efficiency;
- liquidity;
- institutional framework.
Market classifications are reviewed periodically and may change as countries satisfy or cease to satisfy MSCI's classification standards.
Constituent selection
Companies included in the index are selected using transparent eligibility criteria.
Principal considerations include:
- free-float market capitalization;
- liquidity;
- trading frequency;
- foreign ownership availability;
- investability;
- exchange listing.
MSCI periodically reviews constituent eligibility to ensure that the index continues to represent the investable emerging market universe.
Geographic representation
The MSCI Emerging Markets Index includes companies from multiple emerging economies across several regions.
Representative regions include:
- Asia;
- Latin America;
- Europe;
- the Middle East;
- Africa.
The number of countries represented and their respective weights change over time as market capitalizations, accessibility, and country classifications evolve.
Sector representation
The index includes companies from a broad range of economic sectors.
Major sectors represented include:
- information technology;
- financial services;
- consumer discretionary;
- consumer staples;
- communication services;
- healthcare;
- industrials;
- energy;
- materials;
- utilities.
Sector weights vary according to changes in constituent market capitalizations and periodic index reviews.
Index maintenance
MSCI conducts regular reviews of the index to maintain its representativeness and investability.
Maintenance activities include:
- constituent additions;
- constituent deletions;
- free-float adjustments;
- corporate action adjustments;
- country classification reviews;
- periodic rebalancing.
These reviews ensure that the index accurately reflects developments within emerging equity markets.
Applications
The MSCI Emerging Markets Index is widely used throughout the global investment industry.
Its principal applications include:
- portfolio benchmarking;
- exchange-traded funds;
- index funds;
- institutional investment;
- asset allocation;
- performance evaluation;
- financial research;
- derivatives trading.
Many international investment mandates designate the MSCI Emerging Markets Index as the benchmark for emerging market equity portfolios.
Advantages
The index offers several advantages.
Its transparent methodology, broad geographic diversification, and free-float weighting provide investors with standardized exposure to emerging equity markets. The index also facilitates international portfolio diversification by representing companies across multiple countries and economic sectors.
Regular reviews and objective constituent selection contribute to the credibility and consistency of the benchmark.
Limitations
Despite its widespread use, the MSCI Emerging Markets Index has several limitations.
Constituent weights are influenced by market capitalization, resulting in greater concentration among larger markets and companies. Emerging markets may also experience higher levels of economic, political, regulatory, and currency risk than developed markets.
Changes in country classifications, market accessibility, or foreign investment regulations may also affect index composition and investment performance.
Relationship with other MSCI indices
| Index | Primary coverage |
|---|---|
| MSCI World Index | Developed markets |
| MSCI Emerging Markets Index | Emerging markets |
| MSCI Frontier Markets Index | Frontier markets |
| MSCI All Country World Index | Developed and emerging markets |
Together, these indices provide comprehensive coverage of global equity markets.
Importance
The MSCI Emerging Markets Index is widely regarded as the leading benchmark for emerging market equities. It provides investors with a standardized measure of the performance of developing economies while supporting international diversification, passive investing, and portfolio benchmarking. The index has become an essential component of global investment management and international capital allocation.
Impact
Since its introduction in 1988, the MSCI Emerging Markets Index has played a significant role in the globalization of equity investing by providing a transparent and investable benchmark for developing economies. Its widespread adoption by institutional investors, exchange-traded funds, and index funds has contributed to increased international capital flows into emerging markets while supporting the continued development and integration of global capital markets.