What Is the EAFE Index?

The EAFE Index is a stock index offered by MSCI that covers non-U.S. and Canadian equity markets. It serves as a performance benchmark for the major international equity markets as represented by 21 major MSCI indices from Europe, Australia, and the Middle East.

The EAFE Index is the oldest international stock index and is commonly called the MSCI EAFE Index.

Key Takeaways

  • The EAFE is a broad market index of stocks located within countries in Europe, Australasia, and the Far East.
  • Developed by Morgan Stanley Capital International (MSCI) in 1969, the EAFE index contains more than 900 stocks from 21 countries.
  • Investors and asset managers often use the EAFE index as a performance benchmark for global developed market equities.

Understanding the EAFE Index

Just as the S&P 500 index represents the performance of small- to large-cap stocks in the U.S. markets, the EAFE Index was created to reflect the performance of small- to large-cap stocks across the developed regions of Europe, Australasia, and the Far East (EAFE). The index was developed by Morgan Stanley Capital International (MSCI) in 1969 and lists more than 900 stocks from 21 countries in the EAFE. As of October 2019, the list of countries by region are provided in the table below:

MSCI EAFE Index Countries

       

Europe

   

Australasia

Middle East

Austria

Germany

Portugal

Australia

Israel

Belgium

Ireland

Spain

Hong Kong

 

Denmark

Italy

Sweden

Japan

 

Finland

Netherlands

Switzerland

New Zealand

 

France

Norway

United Kingdom

Singapore

 

The EAFE index is a market-capitalization-weighted index; its individual components are weighted according to their market capitalization. This means that countries with the largest stock markets, such as Japan and the United Kingdom, will have the largest relative weighting in the index. In addition, changes in the market value of larger securities will result in a bigger move in the index than changes in the market value of smaller stocks. The largest 70% securities in the MSCI EAFE index constitute the index’ large-cap stocks, the 71st to 85th percentiles are the EAFE Mid-Cap, and the 85th to 99th percentiles represent the EAFE Small Cap.

As of December 2018, equities from the Japanese stock markets accounted for the index’s largest allocation at 24.61%. The top 4 countries by allocation in the EAFE index, following Japan, include the United Kingdom – 16.94%, France – 11.10%, Germany – 8.82%, and Switzerland – 8.65%. The top 10 company listings on the index were Nestle, Roche Holding Genuss, Novartis, HSBC Holdings, Toyota Motor Corp., BP PLC, Royal Dutch Shell, Total, AstraZeneca, and SAP. These companies account for $1.64 trillion in market-cap value, or 11.94%, of the index's market capitalization.

The financial sector of the EAFE has the highest weighting in the index. The table below shows the sectors represented in the MSCI EAFE index and their respective weights:


MSCI EAFE Index Sectors

Sector

Weight (%)

Financials

18.56

Industrials

14.73

Consumer Staples

12.00

Health Care

11.59

Consumer Discretionary

11.49

Materials

7.00

Information Technology

6.74

Communication Services

5.36

Energy

5.13

Utilities

3.79

Real Estate

3.60

EAFE vs. ACWI

Another index, developed by MSCI, Inc., which represents the performance of the global market is the MSCI ACWI (All Country World Index). The ACWI index lists 2,491 assets from 47 countries composed of 23 developed countries and 24 emerging economies. Both indices provide a transparent vehicle that can be used by institutional investors to take advantage of profitable investments from multiple capital markets in the world. In comparison, the table below shows the annual performance of both indices from 2006 to 2016:


Annual Performance (%)

Year



MSCI EAFE



MSCI ACWI



2016



1.51



8.48



2015



-0.39



-1.84



2014



-4.48



4.71



2013



23.29



23.44



2012



17.90



16.80



2011



-11.73



-6.86



2010



8.21



13.21



2009



32.46



35.41



2008



-43.06



-41.85



2007



11.63



12.18



2006



26.86



21.53


EAFE Index As a Benchmark

Institutional investors and asset managers use the EAFE index as a performance benchmark for the international developed equity market. By comparing the performance of funds to that of the EAFE index, a manager can ascertain whether she or he is adding value to their clients’ portfolios. Investors and portfolio managers who want an increased level of diversification beyond the U.S. and Canadian equity borders can include stocks from the EAFE in their portfolios. This can typically be done by purchasing index-linked financial products, such as exchange-traded funds (ETFs).

An example of an ETF that tracks the investment results of the EAFE index is the iShares MSCI EAFE ETF (EFA). The ETF has net assets of $60.6 billion with a 0.31% expense ratio, as of October 2019. Other ETFs that mirror the performance of the EAFE index are iShares Core MSCI EAFE (IEFA) and the iShares MSCI EAFE Small-Cap (SCZ) ETFs.