The blind spots of indexing
The MSCI indices are market cap weighted indices, which means that stocks are weighted according to their market capitalization, calculated as stock price multiplied by total number of shares outstanding. Therefore, the stock with the largest market capitalization gets the highest weighting on the index. This reflects the fact that large-cap companies have a bigger impact on an economy than mid- or small-cap companies. A percent change in the price of the large cap stocks in an MSCI index will lead to a bigger movement in the index than a change in the price of a small-cap company.
Each index in the MSCI family is reviewed quarterly and rebalanced twice a year. Stocks are added or removed from an index by analysts within MSCI Inc. to ensure that the index still acts as an effective equity benchmark for the market it represents. When an MSCI index is rebalanced, ETFs and mutual funds must also adjust their fund holdings since they are created to mirror the performance of the indices.