Does inclusion to a msci frontier market index impact stock price_ – investment frontier

ETF inflows have continued to reach record highs in both developed and emerging markets, but ETFs into frontier markets remain small and very niche. Msci us index We recently compiled a list of all the US-listed ETFs with frontier market exposure, and even the largest one, FM, which is based off MSCI’s Frontier Market 100 Index, has about $400 million USD in assets – compare that to SPY which has almost $200 billion USD in assets.

These ETFs are very transparent about the content of their indices, and MSCI will announce index additions and deletions on a quarterly basis.

Eafe msci We were discussing an investment thesis based on these additions and deletions and wanted to test it – is there a material effect on a stock’s price when it is added to or deleted from a MSCI Frontier Market Index?

In large, developed market ETFs, these changes are telegraphed much in advance so there is not much opportunity to take advantage of it. Msci world tobacco index However, our theory was that given the smaller size and niche nature of frontier markets, perhaps there would be more upside in a less efficient market. Msci world performance First, we needed to gather a sample of stocks to test our hypothesis.

We focused on MSCI’s Frontier Market Indices and got a full list of companies that were added or deleted to these indices in the past 2 years – since November 2014, comprising 8 review periods in total. Msci world index data Note that we did not look at small-caps given how small many of these frontier market stocks already were, and we did not focus exclusively on the MSCI Frontier Markets 100 Index. Msci eafe value index All of these additions/deletions came from frontier market country specific indices maintained by MSCI. Msci global index They can be found at their website here.

MSCI usually announces index changes two weeks before the announcement date. Msci world sri So by taking the price of a stock on the day before that announcement date, and comparing it to the price on the day of the actual index action date, we see how the stock has performed after an announcement has been made.

We also tracked the performance of that country’s broader market index to see how much the stock outperformed or under-performed the market in that time. Msci world etf If our theory was correct, stocks that were added to MSCI Frontier Market indices should outperform the broader local market and vice versa for stocks that were deleted.

Unfortunately, given the nature of frontier markets, it was hard to get historical pricing data for Argentina, Bahrain, and Mauritius, but we still had 41 index additions and deletions to test.

The 16 stocks that were added to a MSCI Frontier Market Index over the past two years managed to outperform their local index by 4.1% on average in the time from the index announcement date to the date the stock was officially included: Country

Meanwhile, the 21 stocks that were deleted from a MSCI Frontier Market Index over the past two years managed to under-perform their local index by 2.4% on average over the same time period: Country

The sample size is small, but it seems our investment theory has some merit given how much better index additions performed and how much worse index deletions also did. Msci world healthcare index Yes, the stocks will probably be higher beta to the broad market so you would expect a bigger loss if the broad market is selling off. Msci stock quote However, in the additions the local markets were actually flat in the same time.

Intuitively it makes sense since liquidity is not great in these markets, so even if the buying/selling volumes from index managers is small, it will still have an impact on a stock.

Moving quickly after an announcement made is important to capitalize on this trade, but building a model to predict when a stock is about to be added or at risk of deletion from an index is even better.

To begin we would look at the liquidity restrictions that are one of the main drivers behind MSCI’s decisions to add and delete securities from their indices. Msci world index history That means a stock that has fallen on hard times and no longer meets market cap standards are at further risk of falling if MSCI pulls it from indices; likewise a new stock that has become much larger is a prime candidate for inclusion in the future.