What is MSCI EAFE?
The Most Widely Used International Benchmark Index
The MSCI EAFE is a popular stock market index that's commonly used as a benchmark for major international equity markets. With large and mid-cap representation across developed countries worldwide, excluding the U.S. and Canada, the index covers about 85% of the free float-adjusted market capitalization in each country that it targets.
In this article, we will take a look at the index's history, where to find information, and some important consideration for investors.
MSCI EAFE History
The acronym MSCI stands for Morgan Stanley Capital International, which is a financial institution that provides equity, fixed income, and hedge fund stock market indexes and portfolio analysis tools. As it's most popular international index, the EAFE stands for Europe, “Australasia” (Australia & New Zealand), and the Far East and consists of equities in those markets. Other popular MSCI indexes include MSCI BRIC (covering Brazil, Russia, India, and China) and MSCI World (covering the entire world).
The index was originally developed in 1969 by Morgan Stanley Capital International, which is majority-owned by the investment bank Morgan Stanley. As the oldest international index, EAFE is widely used in the investment management community as the standard for judging the performance of foreign mutual funds and pension accounts. Managers of these funds compare their own performance to the MSCI EAFE to determine whether they are providing value to clients or not.
MSCI EAFE's Advantages
EAFE is similar to the S&P 500 index in that it is an un-managed basket of stocks that offers broad exposure to foreign markets at a low cost. There are a number of index funds that are designed to closely mirror the performance of EAFE; the iShares EAFE exchange-traded fund (ETF) is one of the most popular options.
Managed by Barclays Global Investors, this fund trades on the New York Stock Exchange under the symbol EFA and is widely available to all investors.
The EAFE index also tends to have less volatility than emerging markets, such as the BRICs, which means it may be a safer option for investors looking to diversify internationally. Using mutual funds and ETFs, investors can gain simple exposure to these markets and easily diversify a portfolio.
MSCI EAFE's Disadvantages
Although EAFE is a good starting point, it does have a few shortcomings. Most importantly, the index does not include rapidly growing emerging market countries such as Brazil, Russia, India and China. While these markets have underperformed developed markets in recent years, they have historically been strong areas of growth for investors. These economies could become increasingly important over the coming years as developed countries experience slower growth.
It is also important to bear in mind that EAFE is weighted according to market capitalization. That means that countries with the largest and most advanced stock markets - such as Japan and the United Kingdom – will always tend to have the biggest relative weighting in EAFE, regardless of their investment prospects.
Likewise, countries with smaller stock markets will have less of an impact, even if they deliver spectacular returns.
Where to Find Data on MSCI EAFE
Performance data for EAFE and many other global indices is available for free on the MSCI's website. This data includes top holdings, sector weighting, country weights, and other data that international investors can use in order to ensure that their overall portfolio is properly diversified. In addition, investors can find information regarding valuation metrics and other fundamentals, as well as risk characteristics that may be important to consider when building a portfolio.
Investing in the MSCI EAFE
There are many different exchange-traded funds (ETFs) focused on the MSCI EAFE index. Investors looking for broad exposure to ex-U.S. markets may want to consider these funds to add international diversification to their portfolios.
Some popular MSCI EAFE ETFs include:
- iShares MSCI EAFE ETF (EFA)
- iShares Core MSCI EAFE ETF (IEFA)
- iShares MSCI EAFE Small Cap ETF (SCZ)
Investors should carefully consider the expense ratios, liquidity, and other characteristics of these funds before investing in them.
Key Takeaway Points
- The MSCI EAFE is a stock market index that encompasses Europe, Australia, New Zealand, and the Far East countries.
- MSCI stands for Morgan Stanley Capital International, a financial institution focused on stock market indexes, and EAFE stands for Europe, Australasia, and the Far East.
- The MSCI EAFE is the oldest international stock market index, which has made it the most popular benchmark for many international funds.
- There are many advantages and disadvantages associated with the MSCI EAFE that investors should carefully consider.
- Investors can find more information about the MSCI EAFE on the MSCI's website, including data that can help assess diversification.