What is the MSCI Index? Why Does Each Adjustment Rattle Global Markets?

Many investors active in global markets, especially on platforms like Cashback Island that focus on market dynamics and trading efficiency, often encounter terms like “MSCI weight adjustment” or “MSCI adds or removes constituent stocks” in financial news, followed by significant market volatility. But what exactly is MSCI? And why do the index adjustments of this single company hold such immense influence, capable of directing trillions of dollars in capital flow across the globe?

What Kind of Company is MSCI?

Before delving into the complex world of MSCI indices, it is essential to understand its creator—MSCI Inc. The company’s historical evolution and unique business model are key to understanding its market credibility and global influence.

From Morgan Stanley to an Independent Index Giant

MSCI originally stood for Morgan Stanley Capital International. Founded in 1968, it launched the first global equity indices in 1969, pioneering international stock market indices and providing a crucial benchmark for the nascent field of international investment.

However, many people still mistakenly believe that MSCI is part of the investment bank Morgan Stanley. In fact, to ensure its neutrality and objectivity as an index provider, MSCI has embarked on an independent path. It held its Initial Public Offering (IPO) in 2007 and fully spun off from Morgan Stanley in 2009, becoming an independently listed company on the New York Stock Exchange (ticker: MSCI). Its official Chinese name has been formally established as “明晟公司” (Míng Chéng Gōng Sī). This transition from a division within a giant investment bank to an independent public company is a cornerstone of its global credibility.

What is MSCI’s Core Business Model?

MSCI’s primary source of revenue is not from directly managing client assets or conducting investment trades, but from a highly scalable business model—“License Fees”. Thousands of asset management firms, ETF issuers (like iShares and Vanguard), exchanges, and pension funds worldwide must pay MSCI a license fee if they wish to issue financial products that track MSCI indices (such as ETFs) or use its indices as a performance benchmark for their own funds.

This fee is typically linked directly to the assets under management (AUM) tracking the index. This means that as the global trend of passive investing grows, the more capital flows into products tracking MSCI indices, the higher MSCI’s revenue becomes, without a proportional increase in its operating costs. This business model gives MSCI a powerful “brand moat.” Because its indices are deeply integrated into the global financial system and have become an industry standard, the switching costs for large fund companies to change their benchmark index are extremely high. This allows MSCI to maintain its market leadership and pricing power, even in the face of competition from other index providers.

The “Measuring Stick” of Global Financial Markets

The essence of an index can be understood as a “measuring stick” or a “thermometer” for the market. For instance, to assess the overall performance of the Taiwan stock market, we look at the Taiwan Capitalization Weighted Stock Index (TAIEX). Similarly, when international investors need to evaluate and compare the performance of different national markets globally, they require a unified and credible standard.

The MSCI index system was created to solve this very problem. It overcomes the obstacles of differing methodologies in local index construction (e.g., price-weighted vs. market-cap-weighted) and currency fluctuations by using the US dollar as a unified basis for valuation, establishing a standardized set of tools for measuring global markets. This allows a fund manager in New York to easily compare the investment returns of the Japanese market with the Brazilian market without needing to perform complex data collection and currency conversions. Therefore, the MSCI index is not just data; it has become the “common language” for institutional investors worldwide to communicate market performance, highlighting its undeniable importance.

How to Understand the MSCI Index Family?

MSCI compiles over 160,000 different indices, covering multiple dimensions such as market capitalization, style (growth/value), theme (e.g., AI, climate change), and ESG (Environmental, Social, and Governance). For the average investor, it’s not necessary to master them all. However, by understanding a few of the most core flagship indices, one can build a clear picture of the global market structure.

The Foundation of MSCI Indices: Market-Cap Weighting and Free Float

To understand MSCI indices, one must first grasp their two core construction principles, which are the fundamental reasons for their widespread trust among international institutional investors.

The first principle is “Market-Cap Weighted“. The larger a company’s market capitalization (stock price multiplied by the total number of shares), the higher its weight in the index. Therefore, the stock price fluctuations of large companies have a far greater impact on the index than those of small companies. This is the method commonly adopted by major global indices like the Taiwan Capitalization Weighted Stock Index and the US S&P 500 Index. Taking the MSCI Taiwan Index as an example, TSMC, as Taiwan’s largest company by market cap, has a weight far exceeding any other constituent, making its stock price movement a decisive factor in the index’s direction.

The second, and more critical, principle is “Free Float-Adjusted“. This is a key distinction between MSCI indices and many local indices, and a core reason for their popularity among international institutions. When calculating a company’s market cap weight, MSCI does not use its total market cap. Instead, it only considers the shares that are freely available for trading on the open market. It excludes “non-free-float” shares that are held long-term by strategic investors such as governments, affiliated companies, company founders, or internal executives and are not readily available for trading. The purpose of this is to make the index more accurately reflect the actual investment opportunities available in the market, thereby making it easier and more accurate for funds tracking the index to replicate its composition. This enhances the “investability” and “replicability” of the index.

Key Indicators for Global Allocation: MSCI ACWI & MSCI World Index

Among MSCI’s many indices, two flagship global indices are the most important, but their coverage differs.

• MSCI ACWI (All Country World Index): This is MSCI’s most representative and comprehensive global stock index. It aims to capture the overall performance of the global stock market, with its constituents covering large and mid-cap stocks from 23 developed markets (e.g., US, Japan, Germany) and 24 emerging markets (e.g., China, Taiwan, India). The index currently includes over 2,500 constituents, covering about 85% of the global investable equity market capitalization. In terms of country weighting, the US market holds a dominant position with a weight of approximately 64%. For investors looking for one-stop global investment, the MSCI ACWI Index is the most complete indicator of “global” stock market performance.
• MSCI World Index: Unlike the ACWI index, the MSCI World Index’s coverage is limited to the markets of 23 developed countries and does not include any emerging markets. Therefore, it primarily reflects the stock market performance of the world’s mature economies.

A Bellwether for Developed Markets: MSCI EAFE Index

The MSCI EAFE (Europe, Australasia, and the Far East) Index is another extremely important international index in global asset allocation. Its name reveals its geographical scope, primarily tracking the stock market performance of 21 developed countries in Europe, Australasia, and the Far East. The most crucial point is that this index excludes the two North American markets: the United States and Canada. For investors who wish to diversify away from an over-concentration in the US market and focus on investing in other developed economies, the EAFE index is an indispensable benchmark. Its main country weights are distributed among Japan, the UK, France, Germany, and Switzerland.

MSCI Indices Relevant to Taiwan

The Taiwanese stock market was included in the MSCI index system in 1996, with its inclusion factor gradually increasing in the following years. Currently, Taiwan is classified as an “Emerging Market” in MSCI’s global market classification. This classification gives Taiwan a place in several important MSCI indices:

• MSCI Taiwan Index: This is a country-specific index designed to measure the performance of the Taiwanese stock market, composed of about 88 to 89 of Taiwan’s most liquid and representative large and mid-cap companies. Its list of constituents is highly similar to that of the well-known Yuanta Taiwan 50 ETF (0050), making it the most important blueprint for international funds investing in Taiwan stocks.
• MSCI Emerging Markets Index: As a member of the emerging markets, Taiwan holds a significant weight in this index, forming part of the global emerging markets investment portfolio along with markets like China, India, and South Korea. Therefore, any change in Taiwan’s weight in this index directly affects the capital allocation of global emerging market funds towards Taiwanese stocks.
• MSCI AC Asia ex Japan Index: In this regional index focusing on Asian markets (excluding Japan), Taiwan is also one of the core components.

What is the Impact of MSCI Index “Rebalancing”?

The MSCI index is not a static list. To ensure it continuously and accurately reflects the dynamic changes in the global market, MSCI regularly conducts systematic reviews and adjustments of all its indices. It is this dynamic adjustment mechanism that makes it a focal point for the global market every quarter, triggering significant trading activity and capital flows on specific dates.

What’s the Difference Between Quarterly and Semi-Annual Reviews?

MSCI’s index adjustments follow a fixed schedule, with four adjustments per year. The results of these adjustments take effect after the market closes on the last trading day of February, May, August, and November. These four adjustments can be divided into two types:

• Quarterly Review: Occurs in February and August. This type of adjustment is usually smaller in scale, possibly involving only minor adjustments to the weights of existing constituents, with fewer changes in the constituent stocks.
• Semi-Annual Review: Occurs in May and November. These two reviews are more comprehensive in scope, and the magnitude of adjustments is typically larger, with more frequent additions (inclusions) or deletions (exclusions) of constituent stocks. Therefore, the semi-annual reviews attract far more market attention than the quarterly ones.

Regardless of the type of review, MSCI usually announces the detailed adjustment results on its official website about 20 days in advance, giving the market ample time to digest the information and prepare.

“Inclusion” and “Exclusion” Criteria for Constituent Stocks

Whether a company’s stock can be included in an MSCI index, or if it needs to be removed from the current list, is not decided subjectively by analysts but is based on a complex yet systematic and transparent set of quantitative rules. The core considerations mainly include the following aspects:

• Size: This is the most important determinant, usually measured by the company’s full market capitalization and free-float market capitalization. When a company’s market cap grows beyond a certain threshold, it may become a candidate for inclusion.
• Liquidity: The stock must have sufficient market trading activity to ensure that large funds can buy and sell smoothly without causing excessive impact on the stock price. MSCI rigorously evaluates a series of liquidity indicators such as historical trading value, trading volume turnover, and frequency of trading.
• Free Float Ratio: As mentioned earlier, this is key to ensuring the index’s investability. MSCI continuously monitors changes in a company’s ownership structure, such as major shareholders selling down their stakes or government divestments, which can affect the calculation of its free float ratio and, consequently, its weight in the index.
• Market Accessibility: For country-level weight adjustments, MSCI also considers the degree of access for foreign investors in that market, such as the existence of foreign ownership limits, capital controls, and other factors.

The “Volume Spike” Phenomenon and Fund Flows on the Effective Date

On the day an MSCI adjustment takes effect, particularly in the final matching session of the Taiwan stock market (13:25 to 13:30), the trading volume of the affected stocks often surges dramatically, a phenomenon commonly known in the market as a “massive volume spike“.

The fundamental reason for this phenomenon is that trillions of dollars in passive funds (such as index funds and ETFs) globally must complete their portfolio rebalancing on that day to ensure their holdings perfectly match the new index constituents and weights that will be effective the next day. This means:

• For stocks whose weights are increased or are newly included, these funds must passively execute buy orders before the market closes.
• For stocks whose weights are decreased or are excluded, they must passively execute sell orders.

This flow of funds is mechanical and not based on fundamental analysis; its sole purpose is to “track the index.” Because the amount of capital involved is enormous and the trades are concentrated in a short period, it causes an instantaneous surge in trading volume.

It is worth noting that the market’s reaction to MSCI adjustments is a complete three-stage process involving “anticipation, announcement, and execution.” Before MSCI officially announces the adjustment list, market analysts make predictions based on the rules, triggering an initial round of speculative trading. After the list is announced, fast-acting active funds and traders position themselves, further driving price changes. Therefore, by the effective date, when passive funds execute their mechanical trades, much of the price movement may have already occurred. This also explains why the simple logic of “inclusion means a rally, exclusion means a drop” does not always hold true on the effective date.

How Can Investors Use and Participate in MSCI Indices?

Having understood the composition and operation of MSCI indices, a natural question arises: as an individual investor, how can this knowledge be applied to actual trading and investment? In fact, whether for long-term global asset allocation or short-term market trading, there are various financial instruments that can help investors participate in MSCI indices. For traders adept at using the professional calculation tools and latest intelligence provided by platforms like Cashback Island, this can be even more advantageous.

Tracking Index Performance Through ETFs

For most investors, the most direct and popular way to participate is by purchasing Exchange-Traded Funds (ETFs) that track specific MSCI indices. The core objective of these ETFs is to replicate the constituents and weights of a specific MSCI index at a low cost, allowing investors to “buy a basket” of high-quality global stocks with a single transaction.

• ETFs Tracking MSCI Global/Regional Indices: Investors can easily buy and sell ETFs that track global or specific regions through brokerages that support international trading. For example, the iShares MSCI ACWI ETF (ACWI), which tracks the MSCI ACWI Index, allows investors to invest in both developed and emerging markets worldwide with a single ETF. Furthermore, the iShares MSCI EAFE ETF (EFA), which tracks the MSCI EAFE Index, or its lower-cost sibling, the iShares Core MSCI EAFE ETF (IEFA), are ideal tools for diversifying away from US stock risk and investing in non-North American developed markets.
• ETFs Tracking the MSCI Taiwan Index: For those who want to invest in Taiwanese stocks following the footsteps of international capital, there are corresponding products available. In overseas markets, the most famous is the US-listed iShares MSCI Taiwan ETF (EWT). On the Taiwan Stock Exchange, investors can trade the Fubon MSCI Taiwan ETF (0057) and the Yuanta MSCI Taiwan ETF (006203).

The following table summarizes a few representative ETFs that track MSCI indices:

Trading with Futures and Contracts for Difference (CFDs)

For traders who prefer short-term trading, wish to use leverage, or want to take both long and short positions, derivative financial products can be used to participate in the volatility of MSCI indices.

• Index Futures: For example, the MSCI Taiwan Index Futures traded on the Singapore Exchange has long been an important tool for international institutional investors to trade or hedge risks in the Taiwanese stock market. It has fixed contract specifications and higher margin requirements, making it more suitable for professional traders with larger capital.
• Contracts for Difference (CFDs): CFDs are a more flexible margin trading tool. They allow investors to participate in index price movements with smaller capital, have flexible contract sizes, and no expiration dates. Investors can easily take long or short positions. However, it is important to note that holding CFD positions overnight incurs overnight financing costs.

As a Reference for Investment Decisions

Even without directly trading the financial products mentioned above, the information published by MSCI is itself highly valuable and can serve as an important aid in investment decision-making.

• High-Quality Stock Pool: Stocks that are included in MSCI indices are typically large, high-quality companies that have passed rigorous screening based on market cap, liquidity, financial stability, and other criteria. They represent the preferences and recognition of international capital. Therefore, investors can view the list of constituents of the MSCI Taiwan Index as a high-quality reference pool for stock selection.
• Judging Global Industry Trends: When MSCI adjusts its indices, the changes in the weights of various industries often reflect the long-term outlook of global capital on different sectors. For example, if the weights of technology stocks or green energy-related industries are continuously increased, it may signify that mainstream global capital is bullish on the long-term development trends of these industries.

What’s the Difference Between MSCI and the Other Major Index Provider, FTSE?

In the field of global index compilation, although MSCI holds a dominant position, it is not the only player. The UK-based FTSE Russell is its main competitor. While both giants offer globally comprehensive index services, there are subtle but crucial differences in their index construction methodologies. For investors pursuing precise global asset allocation, understanding these differences is vital.

Key Difference in Market Classification: The Case of South Korea

The most central and frequently discussed difference between MSCI and FTSE lies in their different classification standards for some countries. The most famous example is South Korea.

• MSCI still classifies South Korea as an “Emerging Market“. MSCI believes that although South Korea’s economy is highly developed, there are still some restrictions regarding market access and foreign exchange convenience that do not fully meet the standards of a developed market.
• FTSE, on the other hand, upgraded South Korea to a “Developed Market” as early as 2009. FTSE places more emphasis on South Korea’s economic size and the general perception of market participants.

This seemingly academic classification difference has a huge impact on the actual composition of an investor’s portfolio. For example, in the MSCI Emerging Markets Index, South Korea holds a significant weight of about 9-15%; however, in the FTSE Emerging Markets Index, South Korea is completely absent. Conversely, FTSE’s developed world index includes South Korea, while MSCI’s does not.

Implications for Index Coverage and Portfolios

Besides market classification, the two also differ in the breadth of their index market coverage.

• MSCI‘s standard indices (like MSCI World) typically aim to cover about 85% of the free float-adjusted market capitalization of each country’s market, defining companies in the bottom 15% of market cap rankings as small-cap and excluding them from the standard index.
• FTSE‘s corresponding indices (like FTSE Developed) aim to cover about 90% of the market cap, with a smaller scope for what it defines as small-cap.

This means that, all else being equal, FTSE’s indices will generally include more companies than MSCI’s, incorporating some mid-cap companies that MSCI classifies as small-cap.

These differences have important implications for investors’ practical operations. When constructing a global investment portfolio, one should avoid mixing index products from these two different providers. For example:

• If you use an “MSCI World Index ETF” (which excludes South Korea) for your developed market allocation and pair it with a “FTSE Emerging Markets Index ETF” (which also excludes South Korea), your global portfolio will completely miss out on exposure to the South Korean market.
• Conversely, if you use a “FTSE Developed World Index ETF” (which includes South Korea) and pair it with an “MSCI Emerging Markets Index ETF” (which also includes South Korea), you will have a double allocation to the South Korean market, leading to excessive risk concentration.

Therefore, when choosing ETFs for global allocation, investors should not only look at their names but also delve into which provider’s index they track and the rules of its construction to ensure the completeness and balance of their investment portfolio.

Conclusion: View MSCI Indices Rationally and Use Information to Grasp Market Pulses

MSCI is an independent, authoritative index provider, and its enormous influence stems from its “infrastructural” role in the global wave of passive investing. While its index adjustments inevitably trigger fund flows and short-term volume spikes, their impact on stock prices is complex and multi-staged. Investors should view these short-term fluctuations rationally and return their focus to a company’s long-term fundamentals and true value.

In the ever-changing financial markets, having accurate and timely information is key to success. Cashback Island is not only committed to substantially reducing your trading costs through rebates but also hopes to be a strong support on your investment journey. We will continue to help you gain insight into the market’s pulse and move steadily forward on your investment path by providing professional educational content like this guide, timely market intelligence, and convenient professional calculation tools.

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Frequently Asked Questions

Q1. How does the MSCI Index define “Emerging Markets” and “Frontier Markets”?

MSCI uses quantitative criteria such as gross national income per capita, market liquidity, and foreign investor accessibility for classification. For example, an emerging market must meet conditions like a market cap exceeding $40 billion and foreign ownership limits below 15%, while frontier markets are typically countries that have not yet met emerging market standards but have economic potential, such as Vietnam and Bangladesh.

Q2. What are the core differences between the global indices of MSCI and FTSE Russell?

The main differences lie in their market classification standards and review frequency. MSCI has stricter reviews on foreign investor accessibility for emerging markets and reviews its constituents quarterly. FTSE Russell adjusts annually and has been more proactive in including markets like Saudi Arabia.

“Trading in financial derivatives involves high risks and may result in the loss of funds. The content of this article is for informational purposes only and does not constitute any investment advice. Please make decisions cautiously based on your personal financial situation. Cashback Island assumes no responsibility for any trading derivatives.”