What Is the EAFE Index? Definition, Countries Included, and Use As an Index

What Is the EAFE Index?

The EAFE Index, or Europe, Australasia and Far East Index, is a stock index published by the Morgan Stanley Capital International (MSCI). The index tracks equity markets outside of the US and Canada.

The EAFE Index is a performance benchmark for the major international equity markets and comprises companies in 21 countries in Europe, Australasia (the countries surrounding the Australian continent, excluding Australia) and the Far East (East Asia).

The EAFE Index (also known as the MSCI EAFE Index) is the oldest international stock index.

Key Takeaways

The EAFE is a broad market index of stocks located in countries in Europe, Australasia, and the Far East (East Asia).

Australasia is a region that includes Australia and New Zealand.

The EAFE (Europe, Australasia and Japan) Index from the investment bank Morgan Stanley Capital International (MSCI), now launched in 1986, has 795 stocks in 21 different countries.

Israel was added to the EAFE Index in May 2010.

The EAFE Index is a reference used by investors and asset managers as a performance benchmark for international developed market equities.

Understanding the EAFE Index

The EAFE Index is a stock market index that tracks performance of mid- and large-capitalisation stocks in 21 developed market countries in Europe, Australasia and the Far East (EAFE). Australasia is a continent-sized area which includes parts of Australia and New Zealand. The EAFE Index, launched by Morgan Stanley Capital International (MSCI) in 1986, consists of 795 stocks from 21 countries.

The EAFE Index is market-capitalisation-weighted. That means that each EAFE member is represented in the Index according to its percentage of the EAFE’s total market capitalisation. Thus the countries with the largest stock markets (in this Index: Japan and the United Kingdom) enjoy the highest relative weighting.

Also, movements in the market value of large-cap securities will cause a bigger shift in the index than movements in smaller-cap stocks.

Countries in the EAFE Index

The following chart illustrates countries which is included 24 countries by the MSCI EAFE index. MSCI reclassified Israel as a developed country in November 2009, and added it to the index in May 2010.

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

 

Composition of the EAFE Index

Companies

On Feb. 28, 2023, the company equities and net adjustments comprised 21.22%, which made up the largest allocation.
The next biggest allocations in movie the index from Europe and Asia-Pacific (EAFE) was in these countries: the United Kingdom (15.33 % ), France (12.41 % ), Switzerland (9.84 % ), and Germany (8.49% ).

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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

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MSCI EAFE Index 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%

 

The commentary which follows relates to pros and cons of the EAFE Index as below, although it can also be argued in favour or against exchange-traded funds (ETFs) or mutual funds designed to track this index’s performance.

Advantages

Diversification: the EAFE Index covers 21 countries and more than 700 companies, so you could easily own a well-diversified international portfolio by buying an ETF or a mutual fund that attempts to replicate the index with a single purchase.

Less volatility: The EAFE Index has significantly less volatility than a few other international indices, largely because it captures companies in developed countries while other indices capture developed, emerging market and developing market countries. Consequently, investments that track it will, on average, have less volatile performance.

Lower costs: Securities designed to track the index – matched bets, if you like – will be passively managed. They’ll cost investors less than actively managed ETFs and mutual funds.

Disadvantages

Lack of country exposure: China, India, Brazil and Russia are not included in EAFE; any investments tracking it will also exclude them and possibly some of their most attractive return opportunities.

Less growth potential: EAFE Index tracks only 21 companies within developed countries. This excludes companies in emerging and developing countries that may have potential for growth and positive returns.

Investments according to market cap: Since the EAFE Index weights its investments according to market capitalisation, funds follow the practice. This would concentrate the fund’s investments heavily in the companies of several countries. That might mean missing out on potential return.

Pros

Diversification

Less volatility

Lower costs

EAFE Index As a Benchmark

The EAFE index is also frequently used as an institutional benchmark for the international developed equity market. It provides a way for institutional investors and asset managers to measure the performance of a fund. A fund can be said to be outperforming its benchmark when its rate of return exceeds that of the EAFE Index. Conversely, it is underperforming if its rate of return falls short of that of the EAFE Index. Asset managers are charged with the responsibility of exceeding a fund’s benchmark; a manager who trailed the average return of the EAFE Index for a year would be hard-pressed to keep their job.

Because stocks from EAFE represent an increased level of diversification for investors who want to go beyond the borders of US and Canadian equity markets, that’s where many of them end up: in investors’ portfolios. They can be bought via index-tracking financial products – for example ETFs.

An ETF that tracks the performance of the EAFE Index is the iShares MSCI EAFE ETF (ticker symbol: EFA). Its net assets are $49 billion. Its expense ratio is 0.33%, as of February 2023. Two other ETFs mirroring the EAFE Index are the iShares Core MSCI EAFE (IEFA) and the iShares MSCI EAFE Small-Cap (SCZ) ETFs.

EAFE vs. ACWI

The chart above shows the chart of MSCI ACWI (All Country World Index) which reflects the market performance. The ACWI holds around 2933 companies in 47 countries-23 developed countries and 24 emerging economies. This benchmark index can be understood as a transparent instrument which can be monitored. It allows investors to take over investment opportunities that could be potentially profitable in several capital markets all over the world.

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 UK.

 

The Bottom Line

The EAFE Index is an international stock index that was launched in 1986 by Morgan Stanley Capital International. The index follows the stocks of companies located in 21 developed countries throughout the world. The U.S. and Canada are among the countries excluded by the index.

The EAFE Index is used as a benchmark by managers of ETFs and mutual funds who seek to provide investors with the potential for return from the countries followed by the index and to match its performance.

About Thiruvenkatam

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