MSCI Index Rebalances: Newly Eligible Shares Driving Weight Changes

_{Source: MSCI, Bloomberg, Northern Trust Asset Management. Weightings as of November 6, 2024 in U.S. dollars. The float is the amount of shares available to the public, which may change because of transactions by insiders. Share changes may occur as companies issue or repurchase shares. Index holdings are provided for information only and should not be construed as a recommendation of any security. It is not possible to invest directly in any index.}

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.

EXHIBIT 2: INDIA CONTINUES BENEFITING FROM INDEX REBALANCES

The benchmark’s weight to India increased by 0.45%, similar to last quarter’s rebalance.

_{Source: MSCI, Bloomberg, Northern Trust Asset Management. Weightings as of November 6, 2024 in U.S. dollars.}

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.

EXHIBIT 3: FLOAT CHANGES DRIVING SECTOR CHANGES ACROSS WORLD AND EMERGING MARKETS

As with countries, single name float changes also meaningfully impacted sector weights in both MSCI World and MSCI Emerging Markets.

_{Source: MSCI, Bloomberg, Northern Trust Asset Management. Weightings as of November 6, 2024 in U.S. dollars.}

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.

Exhibit 4: “Right Way” Performance

Companies added outperformed those deleted from the MSCI World and MSCI Emerging Markets Index during the rebalance period from November 6 to November 25. We call this “right way” performance because it is in line with index fund flows that need to “buy” the additions to the indexes and “sell” deletions out of the indexes.

_{Source: MSCI, Bloomberg, Northern Trust Asset Management, from November 6, 2024 to November 25, 2024. Add and Delete baskets are weighted based on market capitalization.}

What the Rebalance Means to Investors and Index Managers

Index portfolio managers must remain vigilant during these periods to achieve the investment objective of replicating the risk and return metrics of the index and minimize tracking error. From an index tracking perspective, we believe it is crucial to understand the dynamics that surround an index rebalance — liquidity, risk environment, stock- specific news, and offsetting trade flows — to guide index portfolios through these kinds of events with as little wealth erosion as possible.