In recent decades, investing in global markets has become an increasingly common practice for investors looking for growth and portfolio diversification opportunities. In this context, MSCI indices have established themselves as a key tool for monitoring and measuring the performance of a wide range of financial markets around the world.
In this article, we will see what they are, how MSCI indices work and how to invest in them.
What are MSCI indices: meaning
The acronym MSCI stands for Morgan Stanley Capital International, the company that originally composed these and other indices. The MSCI World Index is one of the best-known benchmark stock market indices and represents the economy and financial markets of the developed world. This index is composed of over 1,500 large and mid-cap stocks.
Like all stock indices, MSCI indices are primarily designed to provide information about the direction of financial markets. The index represents the market as a whole.
MSCI indices were the first global indices to be created for markets outside the United States. Originally, the indices were created by Capital International (starting in 1968).
However, in 1986, Morgan Stanley acquired the rights of Capital International, marking the establishment of Morgan Stanley Capital International (hence their name, or acronym MSCI). Thus, MSCI was created with Morgan Stanley as the major shareholder.
In 2004, MSCI acquired Barra, a risk management and portfolio analysis company. The result was the birth of MSCI Barra.
In 2009, MSCI became an independent company based in New York (after the completion of a spin-off). It is responsible for creating these indices and other investment tools.
MSCI offers a number of other services but is best known for its indices. There is a large number of MSCI indices for different geographical areas, types of stocks, bonds, mutual funds, etc. These are available to all investors.
How do MSCI indices work?
MSCI indices are not just a tool for professionals, any investor can use them: they are public. Since they are so popular, their influence on financial markets is huge. When, in one of their reviews, they decide to include a company or give more weight to a geographical area, there is a rush of purchases of the assets included (an important example was the decision to increase the weight of Chinese companies in MSCI Emerging Markets).
An important aspect of MSCI indices is that they use the same method to calculate them, making them very easy to buy and understand. They strive to provide coverage of 85% of their reference market.
The MSCI indices are calculated using the market cap-weighted averages of the prices of the shares included in them. One of the most popular and well-known indices that is not calculated on a weighted average (but a simple average) is the Dow Jones 30.
MSCI index: what does market cap-weighted average mean?
A market cap-weighted average means that the stocks are considered within the index with different weights: weighting by market capitalisation (price per number of shares outstanding) means that stocks with a higher capitalisation have a greater impact on the index.
In this way, the larger companies have more weight in the index. Price changes of these titles lead to greater fluctuations in the index. This is a more accurate way of representing how a market is developing as a whole compared to a simple average.
This does not mean that all companies in the index are large cap; a portion of the portfolio may reserved for small and mid-cap (in equal parts). These indices measure the performance of the market they represent very well and are widely used in the wealth management industry.
MSCI indices are reviewed on a quarterly basis. Similarly, the rebalancing (to adjust the weights of the various assets or regions that make up the index) takes place twice a year.
The main MSCI indices
MSCI indices are of great importance in the financial world. One of their main uses is that they serve as benchmarks in many funds. It is possible to compare the performance of a fund with the performance of the market and know if the manager is doing a good job. Of course, we are referring here to actively managed funds.
In the realm of passive management funds, it is possible to compare a fund with an MSCI index, replicating its composition, in order to imitate its performance: these are MSCI-indexed funds. The positive side of these mutual funds is that since they do not require much management, the fees are significantly reduced.
In addition to mutual funds, there are ETFs (exchange-traded funds) that may have one of the MSCI indices as their benchmark. Although there are many MSCI indices, three of them are particularly popular.
MSCI World Index
The MSCI World Index is a broad global stock index that represents the performance of large and medium-cap stocks in 23 developed markets. It covers approximately 85% of the market capitalisation and does not provide exposure to emerging markets.
The countries with the highest weight, after the United States, are Japan, the United Kingdom, and France. However, the weight of each of them does not exceed 10%.
MSCI World Index: composition
Composed of only of stocks, this index is made up of more than 1,500 companies from 23 developed countries in 3 world areas (Americas, Europe, and Middle East and Pacific). Each economic area is weighted differently in the index:
- United States 68.92%.
- Japan 6.28%
- United Kingdom 4.12%
- France 3.42%
- Canada 3.2%
- Others 14.06%
The distribution by sector is as follows:
- Information technology 24.42%
- Healthcare 13.17%
- Financial 12.7%
- Discretionary consumer goods 10.73%
- Industrial 10.37%
- Consumer goods 7.35%
- Telecommunications and services 7.35%
- Materials 7.34%
- Energy 4.61%
- Services (electricity, gas, water) 2.86%
- Real estate 2.4%
What companies make up the MSCI World Index?
As mentioned before, this index is composed of 1,600 companies. Many ETFs try to replicate it, so they will invest in these companies, trying to weigh them the same as the index.
Some of the companies that make up the MSCI World are the following:
These are the 6 companies with the highest weighting. The following companies weigh less than 1%.
MSCI World Index: price performance
The MSCI World Index captures the representation of large and mid-cap stocks in 23 Developed Markets (DM)*. With 1,506 components, the index covers approximately 85% of the market capitalisation.
MSCI Emerging Markets
This index tracks the performance of emerging markets. It therefore provides a reference point for funds in this category. It was launched in 1988 and consists of more than 1,000 stocks.
MSCI ACWI Index (All Country World Index)
The MSCI All Country World Index (ACWI) is a stock index designed to track the performance of the global stock market. Managed by Morgan Stanley Capital International (MSCI), the index includes the stocks of nearly 3,000 companies from 23 developed countries and 25 emerging markets.
Fund managers use the MSCI ACWI as a guide for asset allocation and as a benchmark for the performance of global stock funds. The index is also used as a basis for creating investment products such as exchange-traded funds (ETFs).
Comparison between MSCI indices: performance
In this summary table, you can see the comparison between the performance of the main MSCI indices in the last year, 3 years, 5 years, 10 years and since creation.
Differences between the MSCI World Index and the MSCI ACWI
The MSCI World Index and MSCI ACWI indices are both global indices developed by MSCI Inc. However, as already discussed in the article, they present some significant differences in their methodology and scope of coverage.
- MSCI World Index: MSCI World Index is an index that represents the performance of the major large and mid-cap companies of 23 developed countries. These countries include the United States, the United Kingdom, Japan, Germany, France and other European countries, as well as Canada, Australia and other selected countries. The MSCI World Index covers approximately 85% of the market capitalisation of stocks in the United States and the rest of the developed world.
- MSCI ACWI: MSCI ACWI, short for All Country World Index, is an index that represents the performance of the major large and mid-cap companies of 50 countries, including both developed and developing countries. In addition to the countries included in the MSCI World Index, MSCI ACWI also includes the stock markets of emerging countries such as China, Brazil, India, South Korea, South Africa, and many others. MSCI ACWI covers approximately 85% of the global stock market capitalisation.
In summary, the main difference between MSCI World and MSCI ACWI lies in the geographical scope of their coverage. The MSCI World Index focuses mainly on developed markets, while the MSCI ACWI extends to include both developed and emerging markets. Therefore, MSCI ACWI provides a more inclusive view of the global landscape of stock investments, allowing investors to get a more comprehensive and diversified exposure to global stock markets.
MSCI ESG ratings are a comprehensive measure of a company's long-term commitment to socially responsible investments (SRI) and environmental, social and governance (ESG) standards. In particular, MSCI ESG ratings focus on a company's exposure to financially relevant ESG risks.
Is it worth investing in MSCI Indices?
When evaluating whether to invest in an MSCI index, there are several factors to consider, along with their advantages and disadvantages. Below are some of the main elements to take into account:
- Global diversification: Investing in the MSCI index allows for geographic diversification as the index covers numerous economies and markets around the world. This can help reduce the risk associated with a single region or country.
- Wide coverage of sectors: The MSCI indices include a wide range of sectors, such as technology, finance, health, energy, consumption and others. This can allow for diversification within your portfolio, reducing the risk of concentration in a specific sector.
- Liquidity: The MSCI index includes many liquid and large stocks, which means that the index components are generally easily traded on the market. This liquidity can be advantageous when buying or selling shares.
- Access to global markets: Investing in the MSCI index offers the opportunity to participate in the performance of international markets, allowing you to benefit from potential growth opportunities in different parts of the world.
How to invest in MSCI world index?
Due to the high number of stocks in the MSCI indices, the only way to invest in these indices is through mutual funds or ETFs. Below is a selection of ETFs listed on the London Stock Exchange:
- Lyxor MSCI World ESG Leaders Extra (DR) UCITS ETF – Acc
- Lyxor MSCI World UCITS ETF – Dist
- Lyxor MSCI World Financials TR UCITS ETF – Acc
- Lyxor MSCI World Health Care TR UCITS ETF – Acc
- ISHARES MSCI UNITED KINGDOM ETF
Find out more about world indices
MSCI indices: summary
You can find these ETFs on online broker platforms, such as Freedom24. Freedom24 has an offering of over 1,500 ETFs from leading managers such as iShares, Vanguard, and BlackRock. The broker's fees and commissions vary depending on the activity and type of account. In this Freedom24 review, you will find more detailed information.
When it comes to investing in stock indices, the options are certainly plentiful and there are many important stock indices to consider. Investing in the Euro Stoxx 50, for example, means betting on the economy of the euro area, with a portfolio of 50 of the largest companies listed on the stock exchange. In the same way, investing in the FTSE 100 index means betting on the largest companies listed on LSE.
The Dow Jones, a price-weighted index of 30 large US companies, is another popular way to invest in the US market. But investors should not overlook indices such as the Russell 2000, which collects 2000 small growing US companies, or the NASDAQ, famous for including many of the world's largest technology companies.
How many MSCI indices are there?
The main MSCI indices are:
ACWI IMI – The index captures the representation of large, mid and small caps in developed and emerging markets countries. This comprehensive index covers about 99% of the global equity investment opportunity.
MSCI World Developed Markets – It is an index designed to offer investors a wide range of choices that reflect different regions, countries, dimensional segments and sectors.
MSCI Emerging Market – Similar to the previous index with a focus on emerging markets.
MSCI China – Includes a series of indices that represent the Chinese markets, aimed at both domestic and international investors, including qualified foreign institutional investors (QFII).
How to invest in the MSCI World Index?
You can do it through several financial instruments and through a broker that provides ETFs or mutual funds.
What are the components of the MSCI World?
The countries currently included in the index are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, New Zealand, Norway, Portugal, Singapore, Spain, United Kingdom and the United States.