MSCI boosted India’s weighting in the MSCI Emerging Markets Index and reduced China’s in its latest quarterly rebalance effective on Monday, November 25, continuing rebalance trends from the past several quarters. India’s weighting sits at 18% from 8% in 2020 while China has continued dropping and now sits at 25% from a peak of around 40% in 2020.

Between the MSCI Emerging Markets Index and the MSCI World Index, MSCI added 22 companies and removed 57. Along with adds and deletes, the broader rebalance triggers a significant amount of trading activity given an estimated $16.5 trillion in assets benchmarked to MSCI equity indexes as of June 30, 2024.¹

The overall turnover for MSCI World was 0.57% (one way), which brought the total rebalance related turnover to 2.36% for 2024. The turnover numbers for MSCI Emerging Markets1 were 1.26% for November and 5.55% for 2024 rebalances. While implementing rebalances in index strategies, portfolio managers focus on minimizing the cost and tracking error to avoid wealth erosion throughout the event. Additionally, investors in active strategies who use indexes for benchmarks need to reassess their exposure to specific sectors or regions because of changes in index composition.

MSCI World: Buffett sells Apple, Spotify newly eligible

MSCI added 10 companies to and removed 21 companies from the MSCI World Index, representing a somewhat benign 0.34% in turnover. The largest addition was Spotify, the Swedish audio streaming company. The company’s primary listing is in the United States, but following the November 2024 Index Review, foreign listings became eligible for inclusion and thus Spotify was added at a 0.09% weight. Carvana was another notable addition. Due to a country change from the United Kingdom to the Netherlands, the online auto platform qualified for inclusion to MSCI Netherlands and thus MSCI World at a 0.04% weight (see Exhibit 1 – Carvana just outside top 3 weight changes).

Although not an add or delete, another notable weighting change is Apple, which saw its weight increase to 0.19%. This was a result of a float increase – Berkshire Hathaway reduced their holdings and those shares became included in the stock’s free float. Other index providers (such as S&P Dow Jones) have already adjusted their free floats for the technology giant.

MSCI Emerging Markets: India continues to benefit from rebalances, Aramco float increases

MSCI added 12 companies to and removed 36 companies from the MSCI Emerging Markets Index, representing a 0.74% in turnover. All of the additions came from the Asia-Pacific region and represented 0.42% overall. As seen in previous rebalances, the majority of the deletes came from China, accounting for 20 of the 36 names. MSCI removed Chinese companies because they failed to meet higher requirements for free float adjusted market capitalization set by MSCI’s methodology. On the addition side, the largest addition was Taiwanese game maker International Games, which was added at a 0.09% weight. Notable float changes included HDFC and Aramco following share offering earlier in the summer. The vast majority (>97%) of Aramco shares remain excluded from the investible float, so only $43.2 billion of the company’s full float of $1.8 trillion is currently included in MSCI Emerging Markets.

Countries: Sweden benefits from methodology change while India keeps adding constituents

In the MSCI World Index, the rebalance caused modest changes to country weights. Notably, the U.S. weighting rose 0.17% and Sweden jumped 0.08%. Meanwhile, Japan saw its weight decrease a modest 0.06% with no notable individual stock changes. No other countries changed by more than 2.5 basis points (bps).

The rebalance caused more significant changes in country composition to the MSCI Emerging Markets Index, reflecting some stock specific moves. Notably, India’s weight increased by 0.45%, similar to last quarter’s rebalance, although the increase was largely confined to HDFC Bank which saw more shares eligible due to changes in foreign ownership. The largest country decliners were China and Korea, where the 0.12% declines in each country were spread across multiple stocks.

Sectors: Information Technology Shifts Composition

In the MSCI World Index, sector weightings shifted slightly. Information technology and communication services increased by 0.17% and 0.03%, respectively. Within information technology, as mentioned, Apple’s float change drove the majority of the increase, with Nvidia seeing a small weight decrease of 0.02% due to its index shares changing. In the MSCI Emerging Markets Index, financials and energy saw the biggest increases with HDFC Bank (+0.35%) and Saudi Aramco (+0.13%). Materials and information technology were the biggest decliners.

Performance Analysis: Adds Outperformed Deletes

As expected, we observed substantial trading during the rebalance period from the November 6 MSCI announcement of the rebalance details to the Monday (November 25) effective date of the rebalances, peaking on the effective date. Indexers do most of their buying at or near the close of effective day because their objective is to match the risk-return characteristics of the benchmark. However, because these rebalances are publicly known, other market participants will take on risk in an aim to profit from rebalance activity. Therefore, we often see stocks of added companies having “buy” pressure post announcement and into effective date while those of deleted companies experience the opposite effect. Intuitively, but not always in reality, the market impact of these flows can lead to adds (deletes) outperforming (underperforming). Should the intuition play out, we refer to outperformance of companies as “right way”, in line with expected flows in (buys) and out (sells) of the indexes. We analyzed to what extent performance went the right way for the adds and deletes for indexes during the rebalance period.

MSCI World Index

Adds rose 11.9% while deletes lost 2.5%, leading to a significantly positive spread of 14.4%. Most notable among adds was the performance of Spotify, which added at a 0.09% weight. Spotify rose 23% from announcement to effective day, including an 11.4% gain on November 13 as the streaming music company gained more premium subscribers than expected. Excluding Spotify, adds still outperformed deletes by 6%, which was an impressive result overall.

Although not an add or delete, Apple’s performance was also notable, as the ubiquitous information technology company was the largest weight increase, and the stock shot higher 1.3% over the last 15 minutes of trading and closed near session highs on the effective date.

MSCI Emerging Markets Index

Additions outperformed deletes by 5.9% in the MSCI Emerging Markets Index. Among the deletes, there were several names in Asia-Pacific Region that significantly underperformed over the announcement to effective date, including a 30% drop from Korean information technology company CosmoAM&T, which dropped pretty consistently although rallied 4.3% on effective day.

Focusing on the additions in India and the deletions in China, the five Indian adds were down 2.8% from announcement to effective date, actually underperforming the broader MSCI India Index which was only down 1.6% over the same period. And regarding China, the 20 Chinese deletes were down 2.0% from announcement to effective date, significantly outperforming MSCI China which was down 7.3% over the same period. Thus, while the add-delete spread was “right way”, overall, controlling for countries actually reveals a different picture across these two countries.