April 2020 – Prevalent benchmark indices for the emerging markets have helped to standardize an otherwise unorganized asset class. Index providers have sought to make indices highly scalable and rapidly replicable so as to facilitate the manufacture of index-based products and defer any concerns regarding capacity constraints. This subjective emphasis on “scalability and replicability” has overshadowed efforts to create a benchmark that offers a high degree of fidelity to the underlying market structure of the emerging markets. Part I introduces a simple framework for understanding different approaches (subjective versus objective) to measuring markets.

April 2020 – Using Part I’s framework of two possible approaches to measuring markets, Part II provides a series of comparisons between the normative benchmark (the flagship MSCI Emerging Markets Index) and an objectively quantified EM benchmark. Marked differences across country, capitalization, and industry exposures illustrate that benchmarking to a normative index under-invests in China and excludes the majority of small-capitalization constituents. Backward-looking capitalization-based indices, like the MSCI EM Index, might exclude or de-emphasize some of the industries and companies – and ultimately the opportunity for growth – that are associated with the developing world and its emergence.