What Is the EAFE Index?

The EAFE Index is a stock index offered by Morgan Stanley Capital International (MSCI). It covers non-U.S. and non-Canadian equity markets. The EAFE Index serves as a performance benchmark for the major international equity markets and includes companies in 21 countries in Europe, Australasia, and the Far East (East Asia). The EAFE Index is the oldest international stock index and is also known as the MSCI EAFE Index.

Understanding the EAFE Index

The EAFE Index was created to track the performance of mid- and large-cap stocks across 21 developed market countries in Europe, Australasia, and the Far East (EAFE). Australasia is an area that includes Australia and New Zealand. The index was launched by Morgan Stanley Capital International (MSCI) in 1986 and covers 795 stocks from 21 countries.

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, have the largest relative weighting in the index.

In addition, changes in the market value of larger-cap securities will result in a bigger move in the index than changes in the market value of smaller-cap stocks.

Countries in the EAFE Index

The countries covered by the MSCI EAFE Index are shown in the chart below. Israel was classified by MSCI as a developed country in May 2010 and added to the EAFE Index at that time.

MSCI EAFE Index Countries
Europe			Pacific	Middle East
Austria	Germany	Portugal	Australia	Israel
Belgium	Ireland	Spain	Hong Kong
Denmark	Italy	Sweden	Japan
Finland	Netherlands	Switzerland	Singapore
France	Norway	United Kingdom	New Zealand

Composition of the EAFE Index

Companies

As of Feb. 28, 2023, equities of companies listed on Japanese exchanges accounted for the index's largest allocation at 21.22%. The top four countries in the EAFE Index, following Japan, include the United Kingdom (15.33%), France (12.41%), Switzerland (9.84%), and Germany (8.49%).

The top 10 company listings and their index weights are shown below. These companies account for $2.15 trillion in market-cap value and approximately 14% of the index's market capitalization.

Nestlé	2.07%
ASML Holding N.V.	1.67%
Novo Nordisk B	1.56%
LVMH Moet Hennessy	1.54%
Shell	1.48%
AstraZeneca	1.36%
Roche Holding Genuss	1.36%
Novartis	1.22%
TotalEnergies	1.03%
BHP Group (AU)	1.03%

Sectors

The table below shows the sectors represented in the MSCI EAFE Index and their respective weights.

MSCI EAFE Index Sectors
Financials	19.19%
Industrials	15.34%
Health Care	12.73%
Consumer Discretionary	11.67%
Consumer Staples	10.07%
Information Technology	8.08%
Materials	7.7%
Energy	4.9%
Communication Services	4.45%
Utilities	3.32%
Real Estate	2.55%

Advantages and Disadvantages of the EAFE Index

The pros and cons of the EAFE Index discussed below relate to exchange-traded funds (ETFs) and mutual funds that are designed to track its performance.

Advantages

Diversification: The EAFE Index is diversified across 21 countries and more than 700 companies so investors in ETFs and mutual funds that seek to match the performance of the index can get a well-diversified international portfolio conveniently with a single purchase.

Less volatility: The performance of the EAFE Index is less volatile than some other international indices because of its focus on companies in developed countries rather than in developing or emerging market countries. So investments that track it should have less volatile performance as well.

Lower costs: Securities that seek to match the index's performance will be passively managed and, thus, be able to offer investors lower costs relative to actively-managed ETFs and mutual funds.

Disadvantages

Limited country exposure: Countries such as China, India, Brazil, and Russia are excluded from the EAFE Index. Therefore, investments tracking it will also exclude them and their potentially attractive return opportunities.

Less growth potential: The EAFE Index is focused on 21 companies within developed countries. This means that companies in developing and emerging market countries that may offer the potential for growth and appealing returns will be excluded from EAFE-tracking investments.

Investments based on market cap: Since the EAFE Index weights its allocations according to market capitalization, funds do the same. So, fund investments will be most concentrated in the companies of a few countries. That may limit potential return.

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 they are 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 EAFE in their portfolios. Typically, this is done by purchasing index-tracking financial products, such as ETFs.

An example of an ETF that tracks the performance of the EAFE Index is the iShares MSCI EAFE ETF (EFA). EFA has net assets of $49 billion and a 0.33% expense ratio, as of February 2023. 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.

EAFE vs. ACWI

The MSCI ACWI (All Country World Index) represents the performance of the global market. The ACWI covers more than 2,933 companies across 47 countries—23 developed countries and 24 emerging economies. Like the EAFE, the ACWI provides a transparent vehicle that can be tracked. Investors can take advantage of potentially profitable investments in multiple capital markets throughout the world. The table below compares the performance of both indices.

Annual Performance (%)
Year	MSCI EAFE	MSCI ACWI
2022	5.84	-18.36
2021	11.26	18.54
2020	7.82	16.25
2019	22.01	26.60
2018	-13.79	-9.41
2017	25.03	23.97
2016	1.00	7.86
2015	-0.81	-2.36
2014	-4.90	4.16
2013	22.78	22.80
2012	17.32	16.13
2011	-12.14	-7.35
2010	7.75	12.67
2009	31.78	34.63

The Bottom Line

The EAFE Index is an international stock index that was launched in 1986 by Morgan Stanley Capital International. The index follows the stocks of companies located in 21 developed countries throughout the world. The U.S. and Canada are among the countries excluded by the index. The EAFE Index is used as a benchmark by managers of ETFs and mutual funds who seek to provide investors with the potential for return from the countries followed by the index and to match its performance.