MSCI Index and What It Measures
REVIEWED BY
ERIC ESTEVEZ
Updated October 26, 2020
The MSCI Indexes are a measurement of stock market performance in a particular area.
Like other indexes, such as the Dow Jones Averages or the S&P 500, it tracks the performance of the stocks included in the index.
MSCI Indexes are used as the base for
exchange-traded funds. The ETF duplicates the Index's stock holdings. That allows investors to profit from gains in the Index.
Similarly, Indexes are also the benchmarks that actively
managed mutual funds use as bases. The exchange-traded funds follow the MSCI Indexes.1 Managed mutual funds try to outperform them by picking better stocks.2
How They Work
MSCI selects stocks for its equity indexes that are easily traded and have high liquidity. The stocks must have active investor participation and be without owner restrictions. MSCI must balance accuracy and efficiency. It must include enough stocks to represent the underlying equity market. At the same time, it can't have so many stocks that ETFs and mutual funds can't mimic the index.
Each Index sums up the total value of all stocks' market capitalization. That's the stock price multiplied by the number of outstanding shares.3 The S&P 500, but not the Dow, uses the same methodology. Market caps are calculated in both U.S. dollars and in local currency. That gives you an idea of how the index is doing without the impact of exchange rates.4
Each index is updated daily, Monday through Friday. Additionally, each index is reviewed quarterly and rebalanced twice a year.5 That's when its manager adds or subtracts stocks to make sure the index still accurately reflects the composition of the underlying equity market it measures.
For that reason, MSCI Indexes have the power to change the market. When an index is rebalanced, all the ETFs and mutual funds that track it must buy and sell the same stocks. Stocks that are added to the index usually find their share prices rising. The opposite happens to stocks that are dropped from an index.