Introduction to the EAFE Index
The EAFE Index is an influential stock index managed by Morgan Stanley Capital International (MSCI), specifically covering non-U.S. and non-Canadian equity markets. It serves as an important performance benchmark for international equity across 21 countries in Europe, Australasia, and the Far East.
Key Highlights
- Broad Scope: The EAFE Index encompasses stocks within 21 developed countries including key regions such as Europe, Australasia, and the Far East.
- Comprehensive Coverage: It was introduced in 1986 by MSCI, and encompasses 795 stocks.
- Significant Additions: Countries such as Israel have been incorporated since 2010, enhancing its breadth.
Understanding the EAFE Index
Launched by MSCI in 1986, the EAFE Index monitors mid- and large-cap stocks from 21 developed nations across Europe, Australasia, and the Far East. Using a market-capitalization-weighted model, countries with larger stock markets such as Japan and the UK dominate the index’s composition.
Countries in the EAFE Index
The EAFE Index’s coverage includes prominent countries like:
- Europe: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom
- Pacific: Australia, Hong Kong, Japan, New Zealand, Singapore
- Middle East: Israel
Composition of the EAFE Index
Leading Companies
As of Feb. 28, 2023, Japan holds the largest allocation at 21.22% in the index. Other significant countries include:
- United Kingdom: 15.33%
- France: 12.41%
- Switzerland: 9.84%
- Germany: 8.49%
Top 10 companies listed by their index weight:
- 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%)
Sector Composition
The EAFE Index represents diversified sectors:
- Financials: 19.19%
- Industrials: 15.34%
- Health Care: 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%
Advantages and Disadvantages of the EAFE Index
Advantages
- Diversification: Over 700 companies in 21 countries ensure robust diversification.
- Stability: Focus on developed markets delivers less volatility.
- Efficiency: Passive management leads to lower investments costs.
Disadvantages
- Limited Exposure: Excludes high-growth economies like China, India, and Brazil.
- Restricted Growth: Focus on developed markets, potentially missing emerging market growth.
- Market Cap Based: Heavy weighting on larger economies might limit returns.
EAFE Index as a Benchmark
Institutional investors and portfolio managers utilize the EAFE Index as a benchmark to gauge performance in developed international markets. Financial products such as ETFs mirror its performance closely, providing diversified global exposure. Examples include:
- iShares MSCI EAFE ETF (EFA)
- iShares Core MSCI EAFE (IEFA)
- iShares MSCI EAFE Small-Cap (SCZ)
EAFE vs. ACWI
The MSCI ACWI encompasses a broader global market perspective, covering both developed and emerging markets. A performance comparison highlights different annual results, giving investors varied portfolio optimization strategies.
| 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 |
Frequently Asked Questions
What Does MSCI EAFE Stand for?
- MSCI EAFE combines Morgan Stanley Capital International and Europe, Australasia, and Far East.
Does MSCI EAFE Include China?
- No, MSCI EAFE excludes China, along with other major economies like India, Brazil, and Russia.
What Companies are in the MSCI EAFE Index?
- The index includes companies from 21 developed nations, namely 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.
Conclusion
The EAFE Index remains a significant tool for international equity investment. Serving as a benchmark, it helps ETFs and mutual funds carve paths to global diversification. Excluding volatile markets, it offers a stable, strategically composed portfolio opportunity in developed markets.
Related Terms: MSCI ACWI, exchange-traded funds (ETFs), market-capitalization-weighted index.
References
- MSCI. “MSCI EAFE Index (USD)”.
- Haaretz. “MSCI Declares Israel Is Now a Developed Market”.
- iShares. “iShares MSCI EAFE ETF”.
- MSCI. “MSCI ACWI Index”.
