The Morgan Stanley Capital International (MSCI) Emerging Markets Index measures the overall performance of equity markets in 21 emerging market countries: Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. Given the need for a data source that reliably and accurately measures the performance of equity markets in emerging markets countries over the long term, MSCI's index has become a de facto benchmark for professional money managers and other investors as well as for economists and other researchers. With the globalization of capital and the advent and growth of exchange-traded funds (ETFs), the MSCI Emerging Markets Index is also used as a reference index for emerging markets ETFs, other types of index funds, and index-linked futures, options, and other index-linked derivative contracts.
Covering equity market indexes of 21 emerging markets countries, ETFs, and other passively managed index funds based on the MSCI Emerging Markets Index offer U.S. investors a simple and cost-effective means of gaining broad-based exposure to emerging markets globally. Essentially, the index is compiled by consolidating and recalibrating each constituent's MSCI country index, weighting them according to their respective free-float market capitalization, then summing. The MSCI Emerging Markets Index is just one of a wide range of international, national, regional, industry and sector indexes that Morgan Stanley produces. Other international indexes include the following: the MSCI All Country World & Frontier Markets Index, the broadest the company publishes; the MSCI Frontier Markets Index, an index of country equity markets considered less developed economically than those in the MSCI Emerging Markets Index; and the MSCI Emerging & Frontier Markets Index, which combines the emerging and frontier markets indexes.
Investing in emerging equity markets is by nature, as well as by definition, generally considered riskier than investing in those of their developed country counterparts. Greater currency, economic and political, or country, risk are typically associated with emerging market countries' equity markets. At least in theory, investors should be compensated for these risks, as well as the typically higher volatility of emerging market countries' equity markets, by the potential to earn higher returns. Furthermore, to the extent they have been in existence, past returns and past performance of emerging countries' equity markets have generally been weakly correlated to those in developed countries. Investing in them has therefore traditionally been viewed as a means of reducing the overall risk of an investment portfolio through diversification.