EAFE Index

What is the 'EAFE Index'

The EAFE Index is a stock index that 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.

BREAKING DOWN 'EAFE Index'

Just as the S&P 500 index represents the performance of small- to large-cap stocks in the US 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 926 stocks from 21 countries in the EAFE. As of October 2017, 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 UK, 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 October 2017, equities from the Japanese stock markets comprised of the index’ largest allocation by 23.03%. The top 4 countries by allocation in the EAFE index, following Japan, include the United Kingdom – 17.82%, France – 10.77%, Germany – 9.76%, and Switzerland – 8.24%. The top 10 company listings on the index are Nestle, HSBC Holdings, Novartis, Roche Holding Genuss, Toyota Motor Corp., British American Tobacco, Royal Dutch Shell, Total, BP PLC, and SAP. These companies cover $1.63 trillion, or 11.34%, of the index’ $14.39 trillion float-adjusted 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

21.46

Industrials

14.41

Consumer Discretionary

12.2

Consumer Staples

11.22

Health Care

10.57

Materials

7.85

Information Technology

6.27

Energy

5.05

Telecommunication Services

4.07

Real Estate

3.54

Utilities

3.35

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 comprised 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

Institutional investors and managers use the EAFE index as a performance benchmark for the international developed equity markets. By comparing the performance of his funds to that of the EAFE index, a manager can ascertain whether he is adding value to his clients’ portfolios or not. Investors and portfolio managers who want an increased level of diversification past the US and Canadian equity borders can include stocks from the EAFE to 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 $81.31 billion with a 0.33% expense ratio, as of October 2017, and covers 85% of each country’s investable market capitalization, which does not include most small-cap securities in the index. 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.