When you buy an index-tracking ETF, you are buying someone’s decisions: who gets in, who leaves, when, at what price. In the first instalment, on what the MSCI World is, we looked at the index from the outside; here we open the bonnet and look at the mechanics — the ones written in the MSCI rulebooks we read in full. In MSCI indexes those decisions are not a discretionary stock selection: they follow from a public methodology that sets who may enter, who must leave and when changes are applied. Every index provider has its own rules: in this series we put the questions — who decides, with which filters, when, with what notice — to MSCI, and once we have answered them in full we will take them to the other providers, to find out where the answers match and where they don’t.
Nobody picks “the best stocks”: the three gates
The first thing to get out of your head is the image of a committee choosing “the best stocks”. In MSCI indexes, entry is decided by written filters, applied every quarter to every listed company in every market: pass them and you are in, fail them and you are out. There are three, and they are not alternatives: they apply in sequence — a company that fails the first screen does not proceed to the next — and to get in you must pass all three.
- Size. The company must be large enough — and the threshold is global, not per country: MSCI sets one worldwide reference and every market adapts. The consequence, with an example MSCI itself gives in the manual: Hungary’s Standard Index has four companies, because the fifth is too small by world standards; and in 2026 New Zealand stays in the MSCI World only thanks to the rule requiring at least five constituents in every developed market. At the May 2026 review the size reference for the developed-market “Standard” segment was a full market cap between USD 7.9 and 18.1 billion. Careful: that is not “the threshold to enter the MSCI World” — it is the reference the methodology uses to draw the size segments, recomputed at every review, and it moves over time.
- Free float. Only the shares genuinely buyable on the market count: founders’, states’ and strategic holders’ stakes carry no weight. To get in, at least 15% of the company must be in circulation — and index weight is computed on float, never on full market cap. If a country caps foreign ownership by law, the usable float is the lower of the two.
- Liquidity. The stock must be genuinely tradable: it must have traded on at least nine trading days out of ten over the last three months, and over a year a traded value of at least one fifth of its float must have changed hands (the measure is called ATVR). A gem from the manual: a stock priced above USD 10,000 per share is deemed de facto illiquid and cannot get in — although, curiously, an incumbent that crosses that price stays.
One detail explains a lot: the gates are stricter to enter than to stay. A new stock must clear every full threshold; an incumbent is re-examined against reduced ones (for liquidity, two thirds of the entry bar) and on some filters — minimum float, listing seniority — is not checked at all any more. That is the first half of the anti-revolving-door mechanism.
The buffer: why the doors are asymmetric
The second half is the buffer. Picture a stock worth exactly the mid-cap/small-cap threshold: with a hard rule it would hop in and out on every price swing, and every time thousands of funds would have to buy and sell. MSCI solves it with asymmetric doors: moving up a segment requires beating 150% of the threshold, moving down requires falling below 66.7%. In between, incumbents stay put.
The result is measurable: over the last 12 months the MSCI World turned over just 2.95% of its portfolio. The manual adds further brakes in the same spirit — a stock deleted for certain causes can only return after 12 months, and large float changes are parked and implemented together with the review — all aimed at one declared goal: reducing turnover, i.e. how much replicating funds must buy and sell to keep up with the index.
The quarterly review — and the date nobody knows
Four times a year — February, May, August and November — MSCI rebuilds the universe from scratch and re-applies the filters. It is the index’s “service” (Index Review), and since 2023 all four reviews are full ones (before, only two were). But the interesting part is how the snapshots are taken: not at one moment, but at three.
For the May review, the universe of companies is photographed at end-February, liquidity at end-March, and prices on one of the last ten business days of April — which MSCI chooses and does not announce in advance. The document gives no reason, but the effect is clear: anyone wanting to buy borderline stocks to push them into the index — and sell them on to the funds obliged to buy — does not know which day counts. Price moves after that date generally no longer change the outcome. The result is announced at least two weeks ahead and takes effect at the close of the month’s last day.
Even “day” has a precise, global definition: a business day is a Monday-to-Friday on which markets weighing more than 80% of world capitalisation are open — so Good Friday and US Thanksgiving count as holidays for the whole index. And if a stock is suspended the day before the effective date, its change slips to two days after trading resumes; if it stays suspended for two months, the change is cancelled.
For an index-tracking fund this is no administrative footnote: knowing which data is photographed and when lets the fund prepare its orders before the changes take effect. What actually happens inside an ETF on that day is the subject of part four.
The fast lanes: IPOs, spin-offs, announcements
Between reviews, the index does not sleep. The general rule is that newly listed companies wait for the next review (and must have traded for at least three months), but very large IPOs are fast-tracked: if market cap exceeds 1.8 times the segment’s interim threshold, measured at the close of the first or second trading day, the stock joins at the close of the tenth trading day. MSCI announces it by the open of day three — and has a stated policy of never commenting, beforehand, on the possible inclusion of a not-yet-listed company.
Spin-offs get an even more curious treatment: if the spun-off company is not yet listed on the day the parent distributes it, MSCI creates a temporary synthetic line in the index — it calls it a “detached security” — worth the difference between the parent’s price before and after the split, frozen, until the new company starts trading. An official ghost security, with its own exit rules.
All this works because index-tracking funds are normally given enough notice to prepare. Every corporate event goes through a ladder of announcements of increasing certainty, and nothing is implemented without notice — as a rule, at least two trading days.
Two details that say a lot about the craft. First: once a “Confirmed” notice is out, MSCI proceeds even if new information emerges that would change the outcome — explicitly, to avoid forcing thousands of funds into a last-minute U-turn. Second: only additions and deletions are announced publicly; weight changes (float and share counts) travel only to paying clients, every evening, in a file called ACE. Anyone reading the news sees half the film.
The exits: acquired, bankrupt, suspended
You leave the index by three main routes, and they are not equal at all.
- Acquired by another company. The target leaves at the close of its last trading day, at market price; the acquirer’s changes go in at the same time. With a “no second thoughts” rule: if the merger later collapses, the deleted stock does not come back — it waits for the next review.
- Bankrupt. Here the index does not wait: companies filing for bankruptcy or creditor protection are removed “as soon as possible” — if the stock still trades, the same day at the last price, with an intraday announcement. One of the very few exceptions to the notice rule.
- Suspended for too long. If a stock stays suspended for 50 consecutive trading days, whatever the reason, it is deleted with two days’ notice at a price with a name and an exact value: the “lowest system price”, 0.00001 — effectively zero. For an index-tracking fund that loss becomes final; and if the stock later resumes trading, it is treated as a brand-new company.
A separate case is a delisting from the primary exchange with a listing elsewhere: the stock stays and MSCI simply switches the price source. Not every exit from an exchange is an exit from the index.
The anti-bubble filter and the emergency brake
Two recent rules show the methodology is alive — and we present them concept first, numbers second, because the numbers are many.
The anti-bubble filter (introduced in 2021, extended in 2024): a stock that has posted an extreme, sudden price rise versus its sector and country peers cannot be added to the Standard segment — it stays in the universe and is re-assessed at the next review. MSCI does not explain in the document what prompted the rule; the rule, though, is written with exact thresholds.
The emergency brake (“light rebalancing”, March 2021): if in the days before the announcement the market is under measurable stress, the committees may scale the review down to a light version in which buffers widen and only what is macroscopic moves.
What it means if you hold an ETF
This whole apparatus — gates, buffers, staggered snapshots, notice periods — has a practical goal that directly concerns anyone holding an ETF: making the index cheap to replicate. Every time a stock enters or leaves, the fund tracking it must buy or sell; the fewer and more predictable the changes, the less it costs to follow the index. The 2.95% turnover and the gap between fund return and index return are two sides of the same coin — and the second can be looked at up close: on our ETF tracking difference page you can see how these rules play out in practice, fund by fund, across ETFs tracking the same index.
And the underlying lesson is worth remembering: “passive” does not mean “motionless”. An index changes all the time — four reviews a year plus corporate events — but it changes according to public rules, not opinions. That is the difference between an index and a manager, and the reason the rules are worth reading.
Frequently asked questions
Who decides whether a stock enters an MSCI index?
No manager does: entry is decided by three filters written in the public methodology — size, float and liquidity — applied every quarter to all listed companies. Exceptional cases the rules don’t cover go through an internal committee that documents every decision.
What are the criteria to enter an MSCI index?
Three, applied in sequence: size (one global threshold recomputed at every review), free float (at least 15% of shares must trade on the market) and liquidity (trading on at least 90% of days and yearly traded value of at least 20% of float). For incumbents the bars are lower.
How often does an MSCI index composition change?
Four times a year, at the February, May, August and November reviews, plus corporate events in between: large IPOs, mergers, spin-offs, bankruptcies. Churn stays low nonetheless — in the MSCI World about 3% of the portfolio over the last 12 months.
What is an index buffer?
It is the cushion around size thresholds that prevents constant entries and exits: to move up a segment a stock must beat 150% of the threshold, to move down it must fall below 66.7%. In between, incumbents stay put. It exists to reduce turnover, and thus replication costs.
Does a newly listed company (IPO) enter the index right away?
Normally no: it waits for the next review and must have traded for at least three months. Very large IPOs jump the queue though: if they exceed 1.8 times the segment threshold in the first two trading days, they join at the close of the tenth trading day, with advance notice.
What happens to a stock that goes bankrupt?
It is removed as soon as possible: if it still trades, the same day at the last price, with an intraday announcement. It is one of the few exceptions to the two-day minimum notice. If instead it stays suspended for 50 trading days, it leaves at a token price of 0.00001.
Why doesn’t MSCI announce the “price cutoff” date?
The date on which prices are photographed for the review is one of the last ten business days of the previous month, chosen by MSCI and not communicated in advance. The document gives no reason; the effect is that nobody can move borderline stocks’ prices knowing when it counts.
Do these rules also apply to FTSE or S&P?
No: every index provider has its own methodology, and this guide describes MSCI’s. The questions to ask — who decides, with which filters, when, with what notice — are the same though: once the MSCI series is complete we will take them to FTSE Russell and S&P Dow Jones, checking the answers against their own documents.
What does this mean for ETF holders?
Every entry or exit forces the fund to buy or sell: the fewer and more predictable the changes, the less it costs to replicate the index. Rules like buffers and notice periods exist for this, and their effect shows up in the tracking difference between fund and index.