What Is the EAFE Index?

What Is the EAFE Index?

Let me tell you directly: the EAFE Index is a performance benchmark for major international equity markets. It covers companies in 21 countries across Europe, Australasia, and the Far East— that's where the acronym EAFE comes from.

You should know it's also called the MSCI EAFE Index, provided by Morgan Stanley Capital International (MSCI), and it's the oldest international stock index out there.

Key Takeaways

Here's what you need to grasp: the EAFE is a broad market index of stocks in Europe, Australasia, and the Far East, with Australasia meaning Australia and New Zealand. MSCI launched it in 1986, and it includes 795 stocks from 21 countries. Israel joined in May 2010. Investors and managers use it as a benchmark for international developed market equities.

Understanding the EAFE Index

I'm explaining this straightforwardly: the EAFE Index tracks mid-cap and large-cap stocks in 21 developed markets in Europe, Australasia, and the Far East. Australasia covers Australia and New Zealand. MSCI launched it in 1986, covering 795 stocks from those 21 countries.

It's a market-capitalization-weighted index, so components are weighted by their market cap. That means countries with bigger stock markets, like Japan and the UK, get the largest weights. Changes in larger-cap stocks move the index more than those in smaller ones.

Countries in the EAFE Index

You can see the countries in the MSCI EAFE Index include those in Europe like Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom; in the Pacific like Australia, Hong Kong, Japan, New Zealand, and Singapore; and in the Middle East, Israel. Israel was added in May 2010 after being classified as developed.

Composition of the EAFE Index

As of February 28, 2023, Japanese equities make up the largest part at 21.22%. After Japan, the top countries are the United Kingdom at 15.33%, France at 12.41%, Switzerland at 9.84%, and Germany at 8.49%.

The top 10 companies include Nestlé at 2.07%, ASML Holding N.V. at 1.67%, Novo Nordisk B at 1.56%, LVMH Moet Hennessy at 1.54%, Shell at 1.48%, AstraZeneca at 1.36%, Roche Holding Genuss at 1.36%, Novartis at 1.22%, TotalEnergies at 1.03%, and BHP Group (AU) at 1.03%. These represent about 14% of the index's market cap, totaling $2.15 trillion.

For sectors, financials lead at 19.19%, followed by industrials at 15.34%, healthcare at 12.73%, consumer discretionary at 11.67%, consumer staples at 10.07%, information technology at 8.08%, materials at 7.7%, energy at 4.9%, communication services at 4.45%, utilities at 3.32%, and real estate at 2.55%.

Advantages and Disadvantages of the EAFE Index

I'm talking here about pros and cons for ETFs and mutual funds that track the EAFE Index. On the advantages side, it offers diversification across 21 countries and over 700 companies, so you get a solid international portfolio in one go. It's less volatile because it focuses on developed countries, not emerging ones. Plus, passive management means lower costs compared to active funds.

On the disadvantages, it excludes countries like China, India, Brazil, and Russia, so you miss out on their potential returns. It sticks to developed markets, limiting growth from emerging economies. And since it's market-cap weighted, investments concentrate in a few large countries, which might cap your returns.

EAFE Index As a Benchmark

Institutional investors and managers use the EAFE as a benchmark for international developed equities. By comparing funds to it, they check if they're adding value. If you want diversification beyond the US and Canada, add EAFE stocks via ETFs.

For example, the iShares MSCI EAFE ETF (EFA) tracks it, with $49 billion in assets and a 0.33% expense ratio as of February 2023. Others include iShares Core MSCI EAFE (IEFA) and iShares MSCI EAFE Small-Cap (SCZ).

EAFE vs. ACWI

The MSCI ACWI covers 2,933 companies in 47 countries, including 23 developed and 24 emerging. It offers broader global exposure. Performance-wise, in 2022 EAFE was 5.84% while ACWI was -18.36%; in 2021, 11.26% vs. 18.54%; and so on back to 2009, where EAFE was 31.78% and ACWI 34.63%.

Frequently Asked Questions

What does MSCI EAFE stand for? It's Morgan Stanley Capital International for Europe, Australasia, and Far East. Does it include China? No, it excludes China, India, Brazil, Russia, and others. What companies are in it? Stocks from 21 countries: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the UK.

The Bottom Line

To wrap this up, the EAFE Index, launched by MSCI in 1986, tracks stocks in 21 developed countries worldwide, excluding the US and Canada. Managers use it as a benchmark for ETFs and funds to match its performance and provide returns from those markets.