Understanding the MSCI Index Family (ACWI, World, EM)

MSCI is a company that organizes the world's stock markets by country, size, and sector and turns them into indexes. These indexes are used as the 'standard (benchmark) that many funds and ETFs track.'

A benchmark is a yardstick that says 'I'll use this report card as my standard.' For example, if a global fund says it 'tracks MSCI ACWI,' that fund holds the countries and companies contained in MSCI ACWI at similar weights, trying to deliver a performance matching that index.

In fact, some tabulations show that assets benchmarked to MSCI ACWI reach about $4.9 trillion — a sign of how much MSCI indexes serve as a common yardstick for global investing.

Knowing MSCI's three flagship indexes gives you the big picture.

- MSCI World — an index that holds only 'developed markets.' It holds large- and mid-cap stocks from 23 developed countries — the U.S., Japan, Europe, and others.

- MSCI Emerging Markets (EM) — an index that holds only 'emerging markets.' It holds 20-some emerging countries — China, India, Taiwan, Brazil, and others.

- MSCI ACWI (All Country World Index) — a 'whole-world' index that combines the two above. Holding both developed and emerging, it covers about 85% of global investable market cap.

To summarize the relationship: ACWI = World (developed) + Emerging Markets (emerging)

In other words, ACWI is commonly the benchmark when people say 'I invest in the whole world.'

MSCI indexes are convenient benchmarks, but there are a few things to keep in mind.

First, they are 'market-cap weighted.' Larger countries and larger companies take a larger weight. So MSCI ACWI also has a very large U.S. weight (as we saw earlier, the U.S. is about half of world market cap). Despite the name 'whole world,' in practice it's heavily tilted toward the U.S.

Second, classifications aren't absolute. While MSCI views Korea as emerging, another body (FTSE) views it as developed. Even for the same 'world index,' the countries held can differ depending on which company's index it is.

Third, tracking an index doesn't make risk disappear. The index itself falls sharply in a downturn. Remember that it's not 'diversified index = safe' but 'even a diversified index can take a loss.'

To sum up, MSCI indexes are a good tool for understanding and comparing world markets, but you can only use them properly when you also look at the weights and limits within them.