A Deal on Developed Markets Exposure (IEFA, EFA)

One of the more noteworthy themes pertaining to exchange-traded fund (ETF) flows in the first quarter was investors embracing international equity funds. In the first three months of 2017, four of the top ten asset-gathering ETFs and two of the top three were international equity ETFs. Proving that investors continue gravitating toward ETFs with low fees, three of those four international ETFs can legitimately be called "cheap."

One of those funds is the iShares Core MSCI EAFE ETF (IEFA). Like the iShares Core MSCI Emerging Markets ETF (IEMG), this year's top asset-gathering ETF, IEFA is part of the iShares core suite, and like IEMG, IEFA is packing on the assets. In the first quarter, investors added more than $4 billion in new capital to IEFA, a total surpassed by just four other ETFs and just one other ex-U.S. developed markets ETF. Although the second quarter is just a few days old, IEFA's popularity has extended into April, as highlighted by over $564 million of inflows. (See also: The 3 Fastest Growing iShares ETFs.)

Just as IEMG is the lower-cost answer to another popular ETF, the iShares MSCI Emerging Markets ETF (EEM), IEFA plays a similar role with the iShares MSCI EAFE ETF (EFA). IEFA charges just 0.08 percent per year, or $8 on a $10,000 investment, compared with EFA's annual expense ratio of 0.32 percent. While IEFA is a large ETF with $21.5 billion in assets under management, its gap in size relative to EFA is far larger than the case of IEMG/EEM. EFA has more than $67 billion in assets under management. (See also: iShares Family of ETFs to See Lower Fees.)

There are some important differences between IEFA and EFA, including the fact that the former tracks the MSCI EAFE Investable Market Index. Initially, investors may not think that this benchmark is vastly different than the MSCI EAFE Index, but IEFA holds over 2,530 stocks compared with the 935 found in EFA. Both ETFs allocate about 51 percent of their respective lineups to Japan, the U.K. and France, in that order. (See also: ETF Investing (SPY): Main Attractions.)

Although IEFA has a significantly larger roster than does EFA, the core ETF has been only slightly less volatile since coming to market in October 2012. Additionally, IEFA has topped EFA by 300 basis points over that period, indicating that much of the core ETF's advantage is attributable to its lower fees. Currently, the Schwab International Equity ETF (SCHF) is the only ex-U.S. developed markets ETF with a lower annual fee than IEFA. SCHF charges just 0.07 percent per year. (See also: How ETF Fees Work.)

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