MSCI Emerging Markets Index Explained
What Is the MSCI Emerging Markets Index?
Launched in 1988 by MSCI (Morgan Stanley Capital International), the index was created to provide a standardized benchmark for the fast-growing but volatile stock markets of developing nations. “Emerging market” is MSCI’s classification for countries with functional stock markets and some degree of foreign investor access, but that don’t yet meet the criteria for developed-market status (which requires factors like economic development, market size, and liquidity).
The index is float-adjusted market-cap weighted and rebalanced semi-annually. It represents about 10–12% of global market capitalization.
Country Breakdown
| Country | Approximate Weight |
|---|---|
| China | ~25% |
| India | ~19% |
| Taiwan | ~18% |
| South Korea | ~12% |
| Brazil | ~5% |
| Saudi Arabia | ~4% |
| South Africa | ~3% |
| Mexico | ~2% |
| Other (16 countries) | ~12% |
Asia dominates — China, India, Taiwan, and South Korea together account for roughly 75% of the index. This heavy Asian concentration means the index is less about “broad emerging markets” and more about “Asian growth economies plus a few others.”
Sector Composition
| Sector | Approximate Weight | Notable Companies |
|---|---|---|
| Technology | ~24% | TSMC, Samsung, Infosys |
| Financials | ~22% | ICBC, HDFC Bank, Itaú |
| Consumer Discretionary | ~13% | Alibaba, MercadoLibre, PDD |
| Communication Services | ~8% | Tencent, Reliance, Baidu |
| Energy | ~5% | Saudi Aramco (limited), Petrobras |
| Materials | ~7% | Vale, POSCO |
| Other | ~21% | Various healthcare, industrials, utilities |
MSCI EM vs. MSCI World vs. S&P 500
| Feature | MSCI EM | MSCI World | S&P 500 |
|---|---|---|---|
| Countries | 24 emerging | 23 developed | U.S. only |
| Stocks | ~1,400 | ~1,500 | 500 |
| Volatility | Higher | Moderate | Moderate |
| Currency risk | High | Moderate | Low (USD) |
| Political risk | Significant | Low | Low |
| Popular ETF | EEM, VWO | URTH | VOO, SPY |
Key Risks of Emerging Market Investing
Emerging markets offer higher growth potential but come with risks that developed markets largely don’t:
Political and regulatory risk: Government policy changes can affect markets overnight — China’s tech crackdown in 2021 wiped hundreds of billions from Chinese stocks. Currency risk: EM currencies can depreciate sharply against the dollar, eroding returns for U.S. investors even when local markets rise. Liquidity risk: Many EM stocks trade with lower volume, making large positions harder to exit. Governance risk: Weaker corporate governance and less transparent accounting standards increase the chance of fraud or mismanagement.
How to Invest
The two most popular ETFs are the iShares MSCI Emerging Markets ETF (EEM) and the Vanguard FTSE Emerging Markets ETF (VWO). Note that VWO tracks the FTSE EM index (not MSCI), which excludes South Korea (classified as developed by FTSE). The expense ratios are higher than developed-market funds — typically 0.08% to 0.70% depending on the fund.
Key Takeaways
- The MSCI Emerging Markets Index covers ~1,400 stocks across 24 developing countries.
- Asia dominates: China, India, Taiwan, and South Korea make up ~75% of the index.
- EM investing offers higher growth potential but comes with political, currency, and liquidity risks.
- Popular ETFs: EEM (iShares, MSCI-based) and VWO (Vanguard, FTSE-based — excludes South Korea).
- EM has underperformed developed markets recently, but historically delivers strong returns after extended periods of relative weakness.
Frequently Asked Questions
Which countries are in the MSCI Emerging Markets Index?
The 24 countries are: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey, and the United Arab Emirates.
Why is South Korea sometimes excluded from EM indexes?
MSCI classifies South Korea as an emerging market, but FTSE Russell classifies it as developed. The difference comes down to their criteria — FTSE emphasizes market infrastructure, while MSCI weighs factors like currency convertibility and foreign ownership limits. This means ETFs like VWO (FTSE-based) exclude South Korea while EEM (MSCI-based) includes it.
Is China too large a portion of the EM index?
Many investors think so. China’s ~25% weight creates concentration risk, especially given its regulatory unpredictability. Some fund managers use “EM ex-China” strategies to get emerging market exposure without the China-specific risk. ETFs tracking the MSCI EM ex-China index are available.
Do emerging markets outperform developed markets over time?
It depends on the time period. From 2003–2010, EM crushed developed markets. From 2011–2024, the S&P 500 dramatically outperformed EM. There’s no guaranteed structural premium — EM returns depend on economic growth rates, currency movements, political stability, and valuations at the time of investment.
What’s the difference between MSCI EM and FTSE EM?
The main difference is South Korea: MSCI includes it as emerging, FTSE classifies it as developed. There are also minor differences in other country classifications and stock selection criteria. For practical purposes, both indexes provide similar EM exposure with slight variations in country weights.