MSCI VS FTSE
Index providers construct indices that measure the performance of a basket of securities intended to represent the aggregate performance of a specific market. These markets can vary from global markets to regional or country-specific markets. This document will compare the differences in index methodology between two of the most popular index providers, MSCI and FTSE.
Both these index providers offer broadly diversified, market capitalisation-weighted indices used by mutual funds and ETFs to track the performance of global markets. We can compare the differences between FTSE and MSCI by looking at the performance of index tracking funds which engage in a full replication strategy to track the performance of these indices. The below chart compares the performance of the iShares MSCI World ETF against the Vanguard FTSE Developed World ETF.
One could easily be misled by the above chart that there really is no significant difference between these two index providers and that they can be used interchangeably in creating globally diversified portfolios. However, it is only when you compare the performance of the emerging market indices that one realises that there may be a difference between MSCI and FTSE. The below chart graphically illustrates the differences by comparing the Vanguard FTSE Emerging Markets ETF against the iShares MSCI Emerging Markets ETF.
As evident in the chart above, there are some apparent differences in the index methodology between MSCI and FTSE which can be attributed to the following factors:
- - Country classification
- - Chinese A-Shares
- - Market Coverage
- - Index Composition
Country Classification
The most significant difference between FTSE and MSCI lies in the countries classified as emerging or developed markets.
South Korea is classified as a developed market by FTSE, comprising approximately 1.53% of the FTSE Developed Index. MSCI, on the other hand, maintains that South Korea should keep its status as an emerging market, with an 11.25% exposure in the MSCI Emerging Markets Index as of 30/06/2022.
Another example is Poland, which has been classified as a developed country by FTSE since June 2019 but remains in MSCI’s Emerging Market Index.
FTSE has also taken its emerging market classification one step further by distinguishing between advanced and secondary emerging markets. A Complete country breakdown of FTSE and MSCI can be seen below:
Chinese A-Shares
Incorporating Chinese exposure into the indices has also contributed to the discrepancy between FTSE and MSCI. The Chinese market has seen considerable change over the last two decades and has become much more integrated and open to foreign investments.
As an example, Chinese A-shares, which are being traded in mainland China on domestic exchanges, were historically unavailable to foreign investors; as the Chinese market opened up, these A-shares have become increasingly more available to foreign investors and gave international investors more exposure to Chinese investment opportunities, leading to a major tilt towards China in emerging market indices.
MSCI has started to include Chinese A-shares in their indices since June 2018, limited to 5% of the investable A-share universe, and in May 2019, the cap on Chinese A-shares increased to 20% as the Chinese markets became more integrated and investable. FTSE has followed similar actions to include Chinese A-shares in their indices but on different dates, contributing to the difference in performance.
Market Coverage
The total market coverage causes another material difference between MSCI and FTSE, as FTSE tends to invest in a larger spectrum of the investable universe. The MSCI All-Country World index covers approximately 85% of the global investable equity opportunity set. In contrast, the FTSE All-World Index covers up to 95% of the investable market capitalisation, which explains why FTSE usually have more securities in their indices than MSCI.
MSCI vs FTSE: Number of shares by index:
Index Composition
Another point of confusion between MSCI and FTSE lies in the name of the indices. For example, it would be entirely reasonable for someone not familiar with these indices to think that the MSCI World Index tracks the whole world, but in reality, it only tracks the global developed markets.
Contrast that to the FTSE World index, which tracks the global developed and advanced emerging markets. The table below shows comparable indices between FTSE and MSCI:
Conclusion
FTSE and MSCI both offer well-diversified indices that track the global market performance. However, there are some differences between these two providers, with the country classification of Korea and the inclusion of Chinese A-shares being the most significant differentiators. Because of these differences, one should avoid mixing index providers at the asset class level in your portfolio. For example, a combination of MSCI Emerging Markets and FTSE Developed will lead to doubling up on South Korea and Poland, which may result in lower portfolio diversification.
Disclaimer
Timeline Planning is a product of Timelineapp Tech Limited. Registered in England. RC: 11405676. Timeline Portfolios is part of Timeline Holdings Limited (Company number 13266210) incorporated under the laws of England and Wales, and operates under the wholly owned regulated subsidiary Timeline Portfolios (Company number 11557205), which is authorised and regulated by the Financial Conduct Authority (firm reference number 840807).
This article has been created for information purposes only and has been compiled from sources believed to be reliable. None of Timeline, its directors, officers or employees accepts liability for any loss arising from the use hereof or reliance hereon or for any act or omission by any such person, or makes any representations as to its accuracy and completeness. This document does not constitute an offer or solicitation to invest, it is not advice or a personal recommendation nor does it take into account the particular investment objectives, financial situation or needs of individual clients and it is recommended that you seek advice concerning suitability from your investment adviser.
Investors are warned that past performance is not necessarily a guide to future performance, income is not guaranteed, share prices may go up or down and you may not get back the original capital invested. The value of your investment may also rise or fall due to changes in tax rates and rates of exchange if different to the currency in which you measure your wealth.
