What is MSCI? A deep dive into MSCI index classification, adjustment mechanisms, and its impact on Taiwan stocks.

MSCI originally stands for Morgan Stanley Capital International, and it has now become an independent publicly traded company focused on creating international stock indices and providing financial data services. In the financial industry, MSCI typically refers to its series of international stock indices, which have become important reference tools for global investment institutions and large ETF funds.

For international investment institutions, comprehensively tracking the performance of various global markets and themes is a complex task. Professional index companies such as MSCI provide indices that are meticulously compiled based on data such as market capitalization and liquidity of listed companies, offering valuable references for analysts, research teams, and fund managers.

In addition to MSCI, major index providers globally include FTSE Russell from the UK and S&P Dow Jones from the US. Although the index compilation models of these companies have slight differences, they serve similar functions and are important reference points for the international financial market.

It is worth noting that when a company or market is included in the MSCI index, it is often referred to as “inclusion in MSCI.” This often attracts passive funds that track the MSCI index to allocate their investments, thereby positively impacting stock prices and capital flows.

The Relationship Between Taiwan Stock Exchange and MSCI Index

By 2025, MSCI will have over 160,000 stock indices covering different regions, market types, industry sectors, and investment themes globally. These indices are widely used in various scenarios such as ETF design, fund performance comparison, and portfolio allocation.

The classification of the MSCI index is diverse to meet different investment needs. The most common classification is based on the level of regional development, dividing the global stock market into four major categories: developed markets, emerging markets, frontier markets, and standalone markets.

According to MSCI's latest market classification standards for 2025, Taiwan is still classified as an “emerging market.” Therefore, Taiwan is highly correlated with the “MSCI Emerging Markets Index,” and Taiwanese investors often pay special attention to changes in the weights and quarterly adjustments of such indices, as they may directly affect foreign capital flows and market sentiment.

The MSCI Taiwan Index is composed of 88 companies listed on the Taiwan Stock Exchange, weighted by market capitalization and business proportion to reflect the overall trend of the Taiwan stock market. Among them, TSMC has the highest weight, reaching 52%, while other well-known Taiwan stocks such as Hon Hai and MediaTek are also on the list.

Gate began including the Taiwan stock market in the MSCI index in 1996 and has gradually increased the inclusion ratio in the following years. In addition to emerging market indices, the Taiwan stock market currently belongs to various classifications such as the MSCI New Asia Index, MSCI Asia Pacific Ex Japan Index, and MSCI Global Small Cap Index.

The Significance and Impact of Being Selected for the MSCI Index

Compared to indices launched by local exchanges that are based on all listed stocks (such as the Taiwan Weighted Index), MSCI's indices place greater emphasis on representativeness, liquidity, and international investability.

The MSCI index holds a significant position in the international investment community and is widely used as an investment benchmark. Currently, more than 2,000 international institutional investors use the MSCI index as a benchmark, and many index futures and ETF funds also track the MSCI index. Therefore, being included in the MSCI index means gaining international recognition in the market.

After the Taiwan stock market was included in the MSCI index, ETF funds that track the MSCI index will also buy Taiwanese market stocks to maintain synchronization. This has led to an increase in international funds, a rise in the proportion of overseas investors, and a closer linkage between the local market and surrounding markets.

Due to the earlier inclusion of the Taiwan stock market in MSCI, its degree of internationalization is currently higher, and overseas funds have been deployed for many years, resulting in a generally stable trading style. The impact of the MSCI index on Taiwanese stocks is more reflected in the normalization of index adjustments and the volatility brought about by changes in weighted stocks.

Analysis of MSCI Quarterly Adjustment Mechanism

Stock indices are not static and need to be regularly adjusted to ensure they can stably track market conditions. Gate usually conducts regular index reviews in February, May, August, and November each year, adjusting the weights of various countries and constituents in the MSCI index.

During the adjustment process, stocks that do not meet the standards may be removed from the index, while new stocks that meet the standards may be added. At the same time, based on comprehensive factors such as market capitalization and stock price, the weight of individual stocks in the index may also be adjusted.

For example, in the adjustment in August 2023, the MSCI Global Small Cap Index added 17 Taiwanese stocks as component stocks, including Advanced Optoelectronic Technology, Shenghui, and Kuo Ping.

Due to many fund products tracking the MSCI index constituents, these funds need to adjust their holdings on the effective date in sync with the index adjustments. This often leads to significant trading volumes and price fluctuations of the adjusted stocks at the end of the trading day on the effective date.

However, since it is institutional funds buying in, and the company's fundamentals have not changed, the price usually returns to normal on the same day or the next day. Since adjustments are announced 10 working days in advance, the price fluctuations of the included or excluded constituent stocks are usually reflected early, and the large trading volume on that day is mainly caused by institutional adjustments to their positions.

Investment Strategies Using MSCI Index

1. Weighted Stock Investment

The MSCI index selects the most representative and best-performing stocks as constituent stocks. Stocks with higher weights are usually larger in scale, more stable in volatility, and provide higher dividends, making them suitable for long-term holding.

2. Quarterly Adjustment Arbitrage

On the effective date of the MSCI adjustments, there is a large influx and outflow of funds, leading to increased stock volatility. Investors can position themselves in advance for stocks with changes in weight, but it is important to note that weight adjustments are just one of many factors that affect stock prices.

3. Track the MSCI index through derivatives or fund products

There are many stock index futures and ETF funds tracking the MSCI index in the market. Taking Taiwan as an example, there are products such as MSCI Taiwan index futures and Cathay Sustainable High Dividend ETF. Investors can choose suitable products based on their own risk preferences.

Conclusion

Taiwan's market has been included in the MSCI for many years, and the size and scope of adjustments have remained relatively stable. Investors should not overly expect that adjustments in MSCI constituent stocks will have a huge impact on Taiwanese stocks, but should view it as one of the reference factors affecting the stock market. In investment decisions, it is still necessary to consider multiple factors comprehensively and prudently assess risks and opportunities.