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What Is the EAFE Index?
The EAFE Index is a benchmark for international equities established by MSCI in 1986. The index is capitalization-weighted and focuses on midcap and large-cap stocks. It is made up of companies from 21 developed countries across Europe, Australasia, and East Asia. The index is significant among investors and asset managers for its use as a trusted performance measure.
Key Takeaways
- The MSCI EAFE Index includes 795 stocks from 21 developed market countries across Europe, Australasia, and the Far East.
- Launched in 1986 by MSCI, the EAFE Index is the oldest international stock index.
- It serves as a benchmark for international developed market equities, often used by investors and asset managers.
- Investors can gain diversified exposure through ETFs and mutual funds that track the EAFE Index.
- The EAFE Index excludes major emerging markets like China, India, Brazil, and Russia.
How the EAFE Index Functions
The EAFE Index tracks midcap and large-cap stocks in 21 developed countries across Europe, Australasia, and the East Asia (EAFE). Australasia includes Australia and New Zealand. The index was launched by Morgan Stanley Capital International (MSCI) in 1986 and covers 795 stocks from 21 countries.
The EAFE Index is a market-capitalization-weighted index. Each component is weighted by market capitalization. This means that countries with the largest stock markets, such as Japan and the United Kingdom, have the largest relative weighting in the index.
Changes in larger-cap securities’ values impact the index more than changes in smaller-cap stocks.
Member Countries of the EAFE Index
The countries covered by the MSCI EAFE Index are shown in the chart below. Israel was classified by MSCI as a developed country in May 2010 and added to the EAFE Index at that time.
| MSCI EAFE Index Countries | ||||
| Europe | Pacific | Middle East | ||
| Austria | Germany | Portugal | Australia | Israel |
| Belgium | Ireland | Spain | Hong Kong | |
| Denmark | Italy | Sweden | Japan | |
| Finland | Netherlands | Switzerland | Singapore | |
| France | Norway | United Kingdom | New Zealand |
Structure and Composition of the EAFE Index
Companies
As of Feb. 28, 2023, Japanese companies held the largest allocation in the index at 21.22%. The top four countries in the EAFE Index, following Japan, include the United Kingdom (15.33%), France (12.41%), Switzerland (9.84%), and Germany (8.49%).
The top 10 companies and their index weights are listed below. These companies account for $2.15 trillion in market-cap value and approximately 14% of the index’s market capitalization.
| Nestlé | 2.07% |
| ASML Holding N.V. | 1.67% |
| Novo Nordisk B | 1.56% |
| LVMH Moet Hennessy | 1.54% |
| Shell | 1.48% |
| AstraZeneca | 1.36% |
| Roche Holding Genuss | 1.36% |
| Novartis | 1.22% |
| TotalEnergies | 1.03% |
| BHP Group (AU) | 1.03% |
Sectors
The table below shows the sectors represented in the MSCI EAFE Index and their respective weights.
| MSCI EAFE Index Sectors | |
|---|---|
| Financials | 19.19% |
| Industrials | 15.34% |
| Healthcare | 12.73% |
| Consumer Discretionary | 11.67% |
| Consumer Staples | 10.07% |
| Information Technology | 8.08% |
| Materials | 7.7% |
| Energy | 4.9% |
| Communication Services | 4.45% |
| Utilities | 3.32% |
| Real Estate | 2.55% |
Pros and Cons of Investing in the EAFE Index
The pros and cons of the EAFE Index discussed below relate to exchange-traded funds (ETFs) and mutual funds that are designed to track its performance.
Advantages
Diversification: The EAFE Index is diversified across 21 countries and more than 700 companies, so investors in ETFs and mutual funds that seek to match the performance of the index can get a well-diversified international portfolio conveniently with a single purchase.
Less volatility: The performance of the EAFE Index is less volatile than some other international indices because of its focus on companies in developed countries rather than in developing or emerging market countries. So investments that track it should have less volatile performance as well.
Lower costs: Securities matching the index are passively managed, offering lower costs than actively managed funds.
Disadvantages
Limited country exposure: Countries such as China, India, Brazil, and Russia are excluded from the EAFE Index. Therefore, investments tracking it will also exclude them and their potentially attractive return opportunities.
Less growth potential: The EAFE Index is focused on 21 companies within developed countries. This excludes companies in developing countries that can offer growth and appealing returns.
Investments based on market cap: Since the EAFE Index weights its allocations according to market capitalization, funds do the same. So, fund investments will be most concentrated in the companies of a few countries. That may limit potential return.
Pros
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Diversification
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Less volatility
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Lower costs
Utilizing the EAFE Index As a Financial Benchmark
Investors and asset managers use the EAFE index as a benchmark for international developed equities. Comparing fund performance to the EAFE Index helps managers assess their value to client portfolios.
Investors and portfolio managers who want an increased level of diversification beyond the U.S. and Canadian equity borders can include stocks from EAFE in their portfolios. Typically, this is done by purchasing index-tracking financial products, such as ETFs.
An example of an ETF that tracks the performance of the EAFE Index is the iShares MSCI EAFE ETF (EFA). EFA has net assets of $49 billion and a 0.33% expense ratio, as of February 2023. Other ETFs that mirror the performance of the EAFE Index are the iShares Core MSCI EAFE (IEFA) and iShares MSCI EAFE Small-Cap (SCZ) ETFs.
Comparing EAFE and ACWI Indices
The MSCI ACWI (All Country World Index) represents the performance of the global market. The ACWI covers more than 2,933 companies across 47 countries—23 developed countries and 24 emerging economies. Like the EAFE, the ACWI provides a transparent vehicle that can be tracked. Investors can take advantage of potentially profitable investments in multiple capital markets throughout the world. The table below compares the performance of both indices.
| Annual Performance (%) | ||
|---|---|---|
| Year | MSCI EAFE | MSCI ACWI |
| 2022 | 5.84 | -18.36 |
| 2021 | 11.26 | 18.54 |
| 2020 | 7.82 | 16.25 |
| 2019 | 22.01 | 26.60 |
| 2018 | -13.79 | -9.41 |
| 2017 | 25.03 | 23.97 |
| 2016 | 1.00 | 7.86 |
| 2015 | -0.81 | -2.36 |
| 2014 | -4.90 | 4.16 |
| 2013 | 22.78 | 22.80 |
| 2012 | 17.32 | 16.13 |
| 2011 | -12.14 | -7.35 |
| 2010 | 7.75 | 12.67 |
| 2009 | 31.78 | 34.63 |
What Does MSCI EAFE Stand for?
MSCI EAFE is an international equity index. The two acronyms stand for Morgan Stanley Capital International and Europe, Australasia, and Far East.
Does MSCI EAFE Include China?
No, it excludes China and certain other countries with major economies such as India, Brazil, and Russia.
What Companies Are in the MSCI EAFE Index?
There are 21 countries included in the EAFE Index. They are Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
The Bottom Line
Launched in 1986 by MSCI, the EAFE Index is an international stock index. The index follows the stocks of companies located in 21 developed countries throughout the world. The United States and Canada are among the countries excluded from the index. The EAFE Index serves as a benchmark for fund managers seeking returns from the included countries.
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