What Is the EAFE Index?
Key takeaways
– The EAFE Index (commonly “MSCI EAFE”) is a market-capitalization‑weighted benchmark that tracks large‑ and mid‑cap stocks in 21 developed markets across Europe, Australasia and the Far East (EAFE). It was launched by MSCI in 1986. [MSCI; Investopedia]
– EAFE excludes the United States and Canada and also excludes many major emerging markets such as China, India, Brazil and Russia. [Investopedia]
– The index is widely used as a benchmark for international developed‑market equity performance and is tracked by ETFs and mutual funds (for example, iShares MSCI EAFE ETF — EFA). [Investopedia; iShares]
– Advantages: built‑in geographic diversification across developed markets, lower volatility vs. emerging markets, low‑cost passive access via funds. Disadvantages: no exposure to U.S./emerging markets, market‑cap concentration in a few countries, limited growth potential relative to emerging markets. [Investopedia]
Understanding the EAFE Index
– What it tracks: Large‑cap and mid‑cap equities across developed markets in Europe, Australasia and the Far East. It is a regional developed‑market international equity benchmark. [Investopedia; MSCI]
– Weighting methodology: Market‑capitalization weighting — larger companies and larger country markets (for example, Japan and the U.K.) represent a larger share of the index, so moves in those names/countries drive index performance. [Investopedia]
– History: Launched by Morgan Stanley Capital International (MSCI) in 1986; one of the oldest international equity indexes. [Investopedia; MSCI]
Countries in the EAFE Index
The MSCI EAFE Index covers 21 developed‑market countries (examples published by MSCI/Investopedia):
– Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom. [Investopedia; MSCI]
(Note: Israel was added to developed‑market status and included in EAFE in 2010.) [Haaretz; MSCI]
Composition of the EAFE Index
– Number of constituents: Several hundred mid‑ and large‑cap stocks (the count varies as MSCI updates the index; Investopedia noted ~795 stocks as of a cited snapshot). [Investopedia; MSCI]
– Country allocation (example snapshot as of Feb. 28, 2023): Japan ~21.22%, United Kingdom ~15.33%, France ~12.41%, Switzerland ~9.84%, Germany ~8.49%. Country weights change over time with market moves and index reconstitutions. [Investopedia; MSCI]
– Sector exposure: The index spans all major sectors; sector weights change with the market and rebalancing.
What companies are in the EAFE Index?
– The index includes many of the largest publicly traded companies domiciled in the 21 developed markets listed above. Because it is market‑cap weighted, the largest multinational and domestic firms in those countries take the biggest weights. The exact top holdings change over time; check the current index provider data or ETF holdings for up‑to‑date lists. [MSCI; iShares]
Advantages and disadvantages of the EAFE Index
Advantages
– Diversification: Broad exposure to 21 developed non‑North American markets with one benchmark/fund. [Investopedia]
– Lower volatility (relative): Focus on developed markets generally means lower volatility than emerging‑market indexes. [Investopedia]
– Low cost: Passive funds that track the index typically have lower expense ratios than active international managers. [Investopedia]
– Widely used benchmark: Useful for performance evaluation by institutional managers. [Investopedia; MSCI]
Disadvantages
– Limited country exposure: No U.S., Canada, or many major emerging markets (China, India, Brazil, Russia), so you miss those return streams. [Investopedia]
– Less growth potential: Emerging markets often provide higher growth potential (and risk) that EAFE excludes. [Investopedia]
– Market‑cap concentration: Heavier weight in the largest country markets and largest companies can limit diversification benefits within the index itself. [Investopedia]
EAFE as a benchmark and how it’s used
– Institutional use: Asset managers and institutional investors use MSCI EAFE to benchmark developed‑market international equity performance. A manager can compare fund returns against EAFE to gauge active value added or tracking performance. [Investopedia; MSCI]
– Retail use: Investors access the index via ETFs and index mutual funds that track MSCI EAFE, gaining instant developed‑market international diversification without buying many individual foreign stocks. Example ETFs include iShares MSCI EAFE ETF (EFA), iShares Core MSCI EAFE (IEFA), and iShares MSCI EAFE Small‑Cap (SCZ). Compare expense ratios, assets under management, and tracking error when choosing a fund. [iShares; Investopedia]
EAFE vs. ACWI
– MSCI EAFE: Developed markets outside North America (ex‑U.S. and ex‑Canada), 21 countries. Good for targeted developed international exposure. [MSCI; Investopedia]
– MSCI ACWI (All Country World Index): Global index covering developed and emerging markets — includes U.S. and emerging markets (over 2,900 companies across ~47 countries). Use ACWI if you want a single global equity benchmark that includes U.S. and emerging markets. [MSCI ACWI; Investopedia]
Common questions
– What does MSCI EAFE stand for? Morgan Stanley Capital International — Europe, Australasia and Far East. [Investopedia; MSCI]
– Does MSCI EAFE include China? No. Major emerging markets such as China, India, Brazil and Russia are excluded from EAFE. [Investopedia]
– What companies are in MSCI EAFE? Large‑ and mid‑cap firms domiciled in the 21 developed markets listed above; exact constituents change over time — check MSCI or ETF fund holdings for current lists. [MSCI; iShares]
Practical steps for investors: How to use EAFE in a portfolio
1. Define your goals and target allocation
– Decide how much international developed‑market exposure you want. Common guidance: a portion of the equity allocation (for example, 20–40% of total equity), depending on home‑bias preferences, risk tolerance and whether you also hold emerging markets and U.S. equities.
2. Choose the right vehicle
– ETFs and index mutual funds that track MSCI EAFE give simple exposure. Compare:
– Expense ratio (lower is generally better).
– Tracking error (how closely the fund tracks MSCI EAFE).
– AUM and liquidity (especially for ETFs).
– Share classes, tax efficiency and trade spreads.
– Example funds: iShares MSCI EAFE ETF (EFA), iShares Core MSCI EAFE (IEFA), other providers also offer funds tracking MSCI EAFE. [iShares; Investopedia]
3. Consider complementing EAFE exposure
– If you want emerging‑market growth, add an MSCI Emerging Markets fund or use MSCI ACWI/ACWI ex‑US allocations to include both developed and emerging markets. This avoids missing China/India/Brazil exposure that EAFE excludes.
4. Decide on currency treatment
– Most EAFE funds are unhedged and expose you to local currency moves vs. your base currency. If you are concerned about currency volatility you can consider currency‑hedged international funds; weigh the cost/benefit.
5. Factor taxes and dividend withholding
– Foreign dividends may be subject to withholding taxes (varies by country). Funds generally handle this on behalf of investors, but net yields are affected. Taxable investors should understand foreign tax credits and reporting. Consult a tax advisor for details.
6. Rebalancing and monitoring
– Rebalance periodically (e.g., annually or semi‑annually) to maintain target allocations. Monitor country/sector concentration, fund performance and any changes in index methodology.
7. Use sizing and risk controls
– Because EAFE is market‑cap weighted and can be concentrated in a handful of countries/sectors, consider position sizing and whether to tilt toward sectors or small‑caps via complementary funds if desired.
8. Evaluate alternatives
– Compare MSCI EAFE tracking funds vs. other region/benchmark funds (e.g., FTSE Developed ex‑North America) if you want different coverage or methodology.
The bottom line
MSCI EAFE is a longstanding, widely used benchmark for developed international equities outside North America. It provides a straightforward way for investors to gain diversified exposure to developed markets in Europe, Australasia and East Asia, but it excludes the U.S., Canada and most emerging markets — a trade‑off between stability and growth opportunity. Choose funds that track the index only after you determine how EAFE fits your overall asset allocation, whether you need emerging‑market exposure, and how currency, fees and tax treatment affect your expected outcomes.
Sources and further reading
– Investopedia, “EAFE Index” — https://www.investopedia.com/terms/e/eafe_index.asp
– MSCI, “MSCI EAFE Index (USD)” — https://www.msci.com/documents/10199/178e6641-0d6e-4ce4-8a1c-7d5b0a7e9a3f
– MSCI, “MSCI ACWI Index” — https://www.msci.com/acwi
– iShares, “EFA: iShares MSCI EAFE ETF” — https://www.ishares.com/us/products/239622/ishares-msci-eafe-etf
– Haaretz, “MSCI Declares Israel Is Now a Developed Market” (on Israel’s reclassification in 2010) — https://www.haaretz.com/1.5142056
If you’d like, I can:
– Compare current EAFE ETFs (EFA vs. IEFA vs. others) with up‑to‑date expense ratios and tracking error.
– Build a sample portfolio allocation using EAFE and show rebalancing examples.
– Retrieve the latest country and sector weights from MSCI and summarize current top holdings. Which would you prefer?