MSCI Indices: What are MSCI indices and how to invest in them?

Many investors have turned to global markets for growth opportunities and portfolio diversification in recent decades. In this context, MSCI indices are widely used to monitor and measure the performance of various financial markets worldwide.

In this article, we will see what MSCI indices are, how do they work and how to invest in them.

What Are MSCI Indices: Meaning

MSCI, which stands for Morgan Stanley Capital International, is the company that originally created these and other indices. The MSCI World Index is one of the most known benchmark stock market indices, representing the economies and financial markets of the developed world. This index comprises 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 created for markets outside the United States. Initially, these indices were created by Capital International, beginning 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 several other services but is best known for its indices. It offers many MSCI indices for different geographical areas, types of stocks, bonds, mutual funds, etc., and 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 MSCI reviews and decides to include a company or give more weight to a geographical area, it often triggers a rush of purchases of the included assets. A notable example is the decision to increase the weight of Chinese companies in the MSCI Emerging Markets index.

An important aspect of MSCI indices is their consistent calculation method, which makes them easy to understand and invest in. They aim to cover 85% of their reference market.

MSCI indices are calculated using market cap-weighted averages of the prices of the included shares. In contrast, one of the most popular and well-known indices is the Dow Jones 30, which is not calculated on a weighted average but rather a simple average.

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. Compared to a simple average, this is a more accurate way of representing how a market is developing as a whole.

This doesn’t mean all companies in the index are large-cap; a portion of the portfolio may be reserved for small and mid-cap stocks, in equal parts. These indices effectively measure market performance and are widely used in wealth management.

MSCI indices are reviewed quarterly. 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 highly important in the financial world. One of their primary uses is serving as benchmarks for many funds. By comparing a fund’s performance to that of the market, investors can assess whether the manager is doing a good job. This is particularly relevant for actively managed funds.

In the realm of passive management funds, a fund can be compared with an MSCI index by replicating its composition to imitate its performance; these are known as MSCI-indexed funds. The advantage of these mutual funds is that the fees are significantly reduced due to their low management requirements.

In addition to mutual funds, some ETFs (exchange-traded funds) 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

This index is made up entirely of stocks and features more than 1,500 companies from 23 developed countries spanning three world regions: the Americas, Europe, the Middle East, and the Pacific. Each economic region is weighted differently in the index:

• The 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 earlier, this index is composed of 1,600 companies. Many ETFs attempt to replicate it by investing in these companies and weighting them similarly to the index.

Some of the companies that make up the MSCI World Index include:

• Apple
• Microsoft
• Amazon
• Nvidia
• Tesla
• Alphabet

These are the six companies with the highest weighting. The following companies weigh less than 1%.

MSCI World Index: Price Performance

The MSCI World Index represents 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. Therefore it provides a reference point for funds in this category. Launched in 1988, the MSCI World Index 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 also serves as a basis for creating investment products such as exchange-traded funds (ETFs).

Comparison Between MSCI Indices: Performance

This summary table compares the performance of the main MSCI indices over the past year, three years, five years, ten years, and since their creation.

Differences Between the MSCI World Index and the MSCI ACWI

The MSCI World Index and MSCI ACWI are both global indices developed by MSCI Inc. However, as discussed earlier in the article, they differ significantly in their methodology and scope of coverage.

1. MSCI World Index: The MSCI World Index represents the performance of the major large and mid-cap companies in 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.
2. 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 includes both developed and emerging markets. Therefore, MSCI ACWI provides a more inclusive view of the global stock investment landscape, allowing investors a more comprehensive and diversified exposure to global stock markets.

MSCI Rating

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 industries, 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, meaning 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 allows you to participate in the performance of international markets and benefit from potential growth opportunities in different parts of the world.

How to Invest in the 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 

MSCI Indices: Summary

You can find these ETFs on online broker platforms, such as Freedom24. Freedom24 offers 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.

When investing in stock indices, the options are certainly plentiful, and there are many important stock indices to consider. For example, investing in the Euro Stoxx 50 means betting on the euro area’s economy, 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. However, investors should not overlook indices such as the Russell 2000, which collects 2000 small-growing US companies, or the NASDAQ, which is famous for including many of the world’s largest technology companies.

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