The new indexes, introduced in phases beginning early next year, will include all listed equity securities of US-domiciled companies traded on the NYSE, AMEX, and the NASDAQ, except investment trusts (other than REITS), mutual funds, and equity derivatives.
MSCI notes that, when appropriate, some non-US incorporated companies may also be considered for inclusion, depending on the firm’s main trading markets, shareholder base and operations base.
MSCI will segregate the US equity universe in three segments:
- the investable market segment
- the micro-cap segment
- the lower micro-cap segment.
Noting that the 2,500 largest companies by total market capitalization cover approximately 98% of the US equity universe – and form an appropriate representation of the investable market segment – MSCI has decided to develop an investable market index.
In addition, MSCI will develop US indexes for the micro-cap segment, which it says will comprise around 2,500 companies with a market capitalization rank lower than those in the investable segment.
MSCI will not devise an index for the remainder of the market (what it terms the lower micro-cap segment, which represents about 0.2% of the US market capitalization).
The new MSCI indexes will break down the investable US market as follows:
- US large-cap index – the 300 largest companies by full market capitalization
- US mid-cap index – the next 450 companies
- US small-cap index – the remaining 1750 companies.
In addition, the large and mid-cap indices will also be combined to create a separate large & mid-cap index of the 750 largest companies in the investable market segment ranked by full market capitalization.
In constructing its US equity style indexes, MSCI says it will define value investment style characteristics using the following variables, utilizing a “z” score to arrive at a composite evaluation:
- book value to price ratio
- 12 months (rolling) forecasted earnings to price ratio
- dividend yield.
Growth style characteristics will consider:
- long term (three to five years) forecasted growth in earnings per share (EPS)
- 12 months (rolling) forecasted growth in EPS
- current sustainable growth rate of EPS (most recent return on equity (ROE) times retention rate)
- five years historical EPS growth rate
- five years historical sales per share growth rate.
MSCI notes that “non-value” does not necessarily equal growth, and yet some stocks may exhibit characteristics of both growth and value.
Consequently, the combined value attribute and combined growth attribute will be used to determine the overall style of a security.
If, however, a style does not clearly dominate, the security will be represented in both the value index and the growth index, with the market capitalization only partially attributed to each index.
MSCI will review the size indices on a semiannual basis (at the end of May and November), as well as partial reviews at the end of February and August. During these index reviews, MSCI says it will use “buffer zones” to manage the migration of companies from one size sub-index to another.
MSCI will free float adjust the market capitalization of constituents in the US equity indices in order to reflect the availability of shares from the perspective of US domestic investors.
Free float is defined by MSCI as the proportion of shares outstanding that are deemed to be available for purchase in the public equity markets by US domestic investors.
That measure excludes so-called “strategic” investments in a company, such as stakes held by federal, state, and local governments and their agencies, controlling shareholders and their families, the company’s management or another company, according to MSCI.
The new MSCI indexes will also incorporate the Global Industry Classification Standard (GICS) for purposes of company industry classification.
MORE information on the index structure and methodology
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