World index provider MSCI will roll out a rejig of its highly followed ACWI and Emerging Markets indexes later this month, a shift likely to have a ripple effect in ETFs linked to the indexes. The revisions, effective Aug 26, will add 42 securities and remove 56 from its international equity universe, according to a Reuters report.
ACWI ETF is in focus as MSCI rejigs its portfolio. Track its prices live.
The three largest market-cap companies being included in the MSCI World Index, covering developed markets, are all U.S.-based growth names: small-satellite launch company Rocket Lab USA Inc. (NASDAQ:RKLB), digital banking company SoFi Technologies Inc. (NASDAQ:SOFI), and buy-now-pay-later firm Affirm Holdings Inc. (NASDAQ:AFRM).
On the side of emerging markets, the biggest new entrants include China Citic Bank Corp, Indonesian conglomerate Dian Swastatika Sentosa Tbk, and gold producer Laopu Gold Co. Ltd.
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Big Money At Stake
The revisions are significant due to the size of MSCI. As of year-end 2024, nearly $17 trillion in assets was tied to its indexes, according to company data, and as of last June, equity ETFs alone accounted for approximately $2 trillion of that amount.
For ETFs that directly mirror MSCI indexes, like the iShares MSCI ACWI ETF (NASDAQ:ACWI), iShares MSCI World ETF (NYSE:URTH), and iShares MSCI Emerging Markets ETF (NYSE:EEM), the rebalance may trigger portfolio managers to purchase newly added stocks and sell removed ones, with temporary spikes in trading volumes.
Country Weight Dynamics
As of July 31, the MSCI Emerging Markets Index‘s largest country exposures were China (29.2%), Taiwan (19.5%), India (16.9%), and South Korea (11%). Adding China Citic Bank and Laopu Gold will increase China’s already substantial weighting somewhat, while adding Dian Swastatika Sentosa increases Indonesia’s relatively modest share.
Funds such as the iShares Core MSCI Emerging Markets ETF (NYSE:IEMG) and the SPDR MSCI ACWI IMI ETF (NYSE:ACIM) will be pro rata adjusted. For investors, this translates to marginal adjustments in exposure, which may be of interest to those adjusting their country or sector wagers.
Short-Term Trading Vs Long-Term Positioning
Index rebalances tend to bring short-term trading spurts in the subject stocks as passive funds rebalance their positions. This tends to cause price movement in the new additions as buying power from index trackers takes over, whereas deletions tend to experience short-term deterioration.
Nevertheless, long-term holders of these ETFs are unlikely to experience significant changes in their risk-return profiles. The MSCI ACWI, for instance, covers over 2,800 firms in 47 developed and emerging markets, which implies that any addition or removal is only a fractional part of the total portfolio.
Winners And Watch Points
The high-profile addition of SoFi Technologies, which has been a fintech adopter’s ride, may attract additional attention from growth-oriented ETF observers. Likewise, Affirm’s inclusion might enhance its exposure among institutional buyers, while the buy-now-pay-later space confronts stricter credit conditions. Rocket Lab, though smaller in market cap, caters to investor interest in space technology and satellite communications.
On the front of emerging markets, China Citic Bank’s addition highlights China’s sustained leadership in the index, despite weakening economic growth, while the inclusion of Dian Swastatika Sentosa signals investor appetite for Southeast Asia’s energy and infrastructure sectors. Laopu Gold may gain from increased gold demand in volatile macro conditions.
Investor Takeaway
For ETF investors, the most significant near-term implication is that August’s MSCI rebalance has the potential to cause price dislocations in both the added and deleted stocks, offering tactical trading opportunities for active traders. For longer-term owners of ACWI, URTH, EEM, or IEMG, the changes will likely be incremental ones, but important ones to note for those who monitor exposure by sector or geography.
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