How an MSCI index review works
MSCI runs its indexes on a published methodology. At each review it checks companies against rules on size, free float, liquidity and, for international indexes, foreign ownership limits.
| Review | Months | Typical scope |
|---|---|---|
| Semi-annual index review | May and November | Additions and deletions, migrations between large, mid and small cap segments, updates to share counts and inclusion factors |
| Quarterly index review | February and August | Fewer changes, mostly from large events and updates to share counts and inclusion factors |
| Ongoing event-related changes | Any time | Mergers, spin-offs, IPOs and other corporate events handled as they happen |
A company's index weight depends on its free float-adjusted market value. For international indexes, MSCI also applies a foreign inclusion factor, which reflects the portion of the equity that foreign investors can actually buy. A change in that factor, after a placement, a lock-up release or a change in foreign ownership rules, can force trading even if the company stays in the index.
The timeline
MSCI publishes the announcement and effective dates for each review in advance on its website, so the schedule can go straight onto a catalyst calendar.
| Date | Event | What to check |
|---|---|---|
| Weeks before | Price and share data cutoff | Which names sit near a size or float threshold |
| About two weeks before effective | Results announced after the close | Additions, deletions, segment migrations, inclusion factor changes |
| Between announcement and effective | Funds and traders position | Price move relative to expected index demand |
| Last business day of the month | Changes effective at the close | Closing auction volume and price |
| Days after | Effective date passes | Whether the move reverses |
Why the changes move stocks
Index-tracking funds aim to match the index, so they buy additions and sell deletions near the effective close. Active managers benchmarked to the index often adjust too. The size of the demand relative to the stock's normal trading decides how much the price moves.
The same mechanics run in reverse for deletions, which our article on index deletions and forced selling covers in more depth.
What tends to happen around a review
Studies of index changes across providers point to a few common patterns, though the size varies widely and has changed over time.
- Pre-announcement drift. Names likely to be added are often identified by traders before the results, so part of the move happens before MSCI publishes anything.
- Announcement reaction. Surprises move prices the next day. Expected changes may barely move.
- Effective-day volume. The closing auction on the effective date often shows very heavy volume.
- Partial reversal. Some of the price effect can fade in the following days or weeks, once index demand is met.
Compared with US index events such as S&P 500 inclusion, the Russell reconstitution or the Nasdaq-100 reconstitution, MSCI reviews matter most for international and emerging market stocks, where foreign index money can be a large share of the shareholder base.
Size segments and market classification
Two parts of the methodology cause the largest changes.
The first is size segment migration. MSCI divides each market into large, mid and small cap segments based on free float-adjusted market value. At semi-annual reviews, a company that has grown can move from small cap to the standard index, which combines large and mid cap, and one that has shrunk can move the other way. Because more money tracks standard indexes than small cap ones, a move up usually brings net buying and a move down net selling. MSCI applies buffers around the cutoffs so that companies near a boundary do not move back and forth at every review.
The second is market classification. MSCI reviews each year whether countries should be classified as developed, emerging or frontier markets, and it consults investors before making changes. A reclassification affects every company in that market at once, and implementation is usually announced well in advance and sometimes phased in over more than one review. These are rare but large events for the stocks involved.
How investors use MSCI reviews
- If you hold a company close to a size threshold, check whether the next semi-annual review could move it between segments.
- If a company has just placed new shares or seen a lock-up expire, its free float and inclusion factor may rise at the next review.
- If a stock has already risen on expected inclusion, compare the move with the likely index demand before assuming more upside.
- If a deletion looks forced rather than fundamental, the selling pressure may create a temporary discount.
For tools that track announced and expected index changes, see the best index change trackers.
Where this goes wrong
Index trades look mechanical, which makes them look safe. In practice the edge is small, crowded and easy to lose to costs or a wrong forecast of the change itself.
- Trading an expected change that does not happen. Predictions use public data, but MSCI's own share counts and float figures may differ from yours.
- Ignoring how much is priced in. By the effective date, the move may already reflect the demand. Buying into the close can mean buying from those who positioned earlier.
- Underestimating costs. Small and emerging market stocks can have wide spreads and limited borrow, which eats into any gain.
- Missing other indexes. A company may be added to one MSCI index and deleted from another, or change weight in several, so net demand can be smaller than the headline suggests.
- Treating index demand as a view on value. The trade is about flows, not the business. After the effective date, the company's fundamentals take over again.
For Dombey's coverage of large stock moves, including index-driven ones, see market coverage.
The bottom line
MSCI reviews its indexes every quarter, with the larger semi-annual reviews in May and November. Results come out about two weeks before the effective close, and funds that track the indexes must trade on that date. The price effect is largest when the required trading is big relative to normal volume, which is most common in smaller and emerging market stocks. Much of the move can happen before the announcement, and some can fade after the effective date, so size the expected demand before acting on any change.