Photo: Rafael Matsunaga / Wikimedia Commons, CC BY 2.0, cropped
What the MSCI Emerging Markets Index Is, and Why One Downgrade Can Move Billions of Dollars
MSCI is a company that builds stock market indexes. It sorts countries into four buckets: developed (like the US, Canada, Japan, the UK), emerging (like China, India, Taiwan, South Korea, Brazil, Indonesia), frontier (smaller, less accessible markets) and standalone (markets tracked separately because of serious access or investability problems). The MSCI Emerging Markets Index is one of the most widely followed benchmarks in the world, and trillions of dollars in index funds and active funds measure themselves against MSCI's indexes. When MSCI moves a country between buckets, funds that track those indexes must buy or sell its stocks, which is why the announcement alone can move markets. MSCI decides based on economic development, size and liquidity, and market accessibility for foreign investors, and announces changes in its annual market classification review, usually in June. In October 2026, MSCI proposed moving Indonesia from emerging to standalone, and Jakarta stocks fell 11.6% in a day.
Who is MSCI?
MSCI (originally Morgan Stanley Capital International) is a company that designs and calculates stock market indexes. Its flagship indexes, including the MSCI World, MSCI ACWI (All Country World) and MSCI Emerging Markets, are used as benchmarks by pension funds, mutual funds and ETFs around the world.
That's the key point. MSCI doesn't manage money itself. But trillions of dollars of investments are either built to copy its indexes or judged against them. When MSCI changes what's in an index, that money has to move.
The four buckets
MSCI sorts every market it covers into a category:
| Category | Examples | What it means |
|---|---|---|
| Developed | US, Canada, UK, Japan, Germany, Australia | Large, open, easy to trade |
| Emerging | China, India, Taiwan, South Korea, Brazil, Saudi Arabia, South Africa, Indonesia (for now) | Large but with some restrictions or less development |
| Frontier | Vietnam, Morocco, Kenya, Bulgaria and others | Smaller, less liquid, harder to access |
| Standalone | Argentina, Lebanon, Ukraine and others | Tracked separately due to serious access problems |
Classifications change. In its June 2026 review, MSCI moved Bulgaria up to frontier and left Argentina and Vietnam unchanged.
How MSCI decides
MSCI uses three sets of criteria:
- Economic development. Mostly relevant for the developed category.
- Size and liquidity. A minimum number of companies that are big enough and trade enough.
- Market accessibility. Openness to foreign ownership, ease of moving money in and out, efficiency of the market, stability of the rules, and transparency.
That third test is where most downgrades come from. It's also why South Korea, despite being a rich economy, has long been classified as emerging: MSCI has raised issues over currency trading and market access.
Why one decision can move billions
Imagine an emerging markets ETF with $100 billion that copies the MSCI Emerging Markets Index. If a country with a 2% weight is removed, the fund must sell about $2 billion of that country's stocks. Multiply that across every fund that tracks or benchmarks to the index.
That's why traders sell the moment a downgrade is proposed: they want to get out before the forced sellers arrive. Upgrades work the other way. Money flows in, often before the upgrade takes effect.
Case study: Indonesia, October 2026
On October 15, 2026, MSCI opened a consultation on moving Indonesia from emerging straight to standalone, skipping frontier. It cited:
- Opaque share ownership structures
- Suspected coordinated trading
- Inadequate regulatory enforcement
The Jakarta Composite fell 11.6% the next day, its worst day since 1998, and another 5.1% the following Monday to a six-year low. Estimates for passive outflows ranged from about $3 billion to $5.6 billion. MSCI will decide by June 30, 2027 (full story).
Other notable past moves:
- Greece was downgraded from developed to emerging in 2013.
- Pakistan was moved from emerging to frontier in 2021.
- Argentina was moved to standalone in 2021 because of capital controls.
- Kuwait was upgraded to emerging in 2020, bringing in billions of passive inflows.
What this means for your emerging markets ETF
If you own a broad emerging markets fund, here's what to know:
- You're diversified. China, India, Taiwan and South Korea usually make up most of the index. A single small-country downgrade moves your fund only slightly.
- Check which index your fund uses. Some popular ETFs track FTSE indexes instead of MSCI, and FTSE classifies a few countries differently. South Korea, for example, is "developed" in FTSE's system.
- Expect more volatility than developed markets. Currency moves, politics and governance issues all add risk.
- Keep EM in proportion. Many diversified portfolios hold a modest slice of emerging markets, often through an all-world ETF that includes them automatically.
New to funds? Start with What Is an ETF? and our guide to diversifying your portfolio.
The bottom line
MSCI's country labels look like dry paperwork, but they direct enormous flows of money. A downgrade can trigger forced selling, and even the threat can crash a market, as Indonesia found out in October 2026. For most investors, the answer is simple: own emerging markets through a broad, diversified fund, and don't let one country's headlines drive your decisions.
This article is educational and not personalized investment advice.
Frequently asked questions
What is the MSCI Emerging Markets Index?
It is a stock index built by MSCI that tracks large and mid-sized companies across about two dozen emerging market countries, including China, India, Taiwan, South Korea, Brazil, Saudi Arabia, South Africa and Indonesia. Many emerging market ETFs and mutual funds track it or use it as their benchmark.
How does MSCI decide if a country is developed, emerging or frontier?
MSCI looks at three things: economic development, the size and liquidity of the stock market, and how easy it is for foreign investors to get money in and out, including ownership limits, capital controls, the regulatory framework and how well the market operates. Only the last two matter for the emerging versus frontier decision.
What is a standalone market in MSCI?
Standalone markets are countries MSCI calculates indexes for but excludes from its main developed, emerging and frontier indexes, usually because of severe accessibility or investability problems. Argentina, for example, has been classified as standalone since 2021. Being moved to standalone means emerging-market index funds have to sell that country's stocks.
When does MSCI announce country upgrades and downgrades?
MSCI publishes its annual market classification review, usually in June. It can open consultations on possible changes at that review or, as with Indonesia in October 2026, at other times. Changes are typically implemented months after a decision, giving funds time to adjust.
Why do stocks fall so much when MSCI announces a downgrade?
Because huge amounts of passive money must follow the index. If a country leaves the MSCI Emerging Markets Index, funds tracking it must sell. Active managers who benchmark against it often sell too. Traders try to sell before those flows arrive, which can cause a sharp drop as soon as a downgrade is proposed.
Should I buy an emerging markets ETF?
Emerging markets can add diversification and exposure to faster-growing economies, but they come with higher volatility, currency risk and governance risk, as Indonesia shows. Many diversified portfolios hold a small slice, often 5% to 15% of stocks, through a low-cost broad EM or all-world ETF. This is general information, not personal advice.
Primary sources
- MSCI — Market classification
- MSCI — MSCI Emerging Markets Index
- Reuters via Investing.com — Indonesia stocks hit six-year low as MSCI warning deepens selloff (Oct. 19, 2026)
- Buenos Aires Times — MSCI upgrades Bulgaria to frontier; Vietnam, Argentina unchanged (2026 review)
- Nikkei Asia — Indonesia stocks post largest drop in 28 years after MSCI warns of downgrade
Data & disclaimer: This article is for educational purposes only and is not financial or investment advice. Figures reflect data available as of Oct 20, 2026, and conditions change — always confirm current pricing, rates and rules with the provider before you act. Written by Elizabeta Dimoska. See our editorial standards and disclosure.
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