MSCI EAFE - The Most Famous International Index
MSCI EAFE is a stock market index that is commonly used as a benchmark for the performance of major international equity markets. The acronym EAFE stands for Europe, “Australasia” (Australia & New Zealand), and the Far East. The index measures the performance of more than 1,000 stocks in 21 countries.
The index was originally developed in 1969 by Morgan Stanley Capital International, which is majority-owned by the investment bank Morgan Stanley and is currently known as MSCI Barra. As the oldest international index, EAFE is widely used in the investment management community as the standard for judging the performance of foreign mutual funds and pension accounts.
MSCI EAFE's Advantages
EAFE is akin to the S&P 500 index in the sense that it is an un-managed basket of stocks, offering broad exposure to foreign markets at a low cost. There are a number of index funds that are designed to closely mirror the performance of EAFE; the iShares EAFE exchange-traded fund is one of the most popular options. Managed by Barclays Global Investors, this fund trades on the New York Stock Exchange under the symbol EFA.
MSCI EAFE's Disadvantages
Although EAFE is a good starting point, it does have a few shortcomings. Most importantly, the index does not include rapidly growing emerging market countries such as Brazil, Russia, India and China. In recent years, limiting your portfolio to the countries represented in EAFE has meant missing out on some of the world’s best performing markets.
It is also important to bear in mind that EAFE is weighted according to market capitalization. That means that countries with the largest and most advanced stock markets - such as Japan and the United Kingdom – will always tend to have the biggest relative weighting in EAFE, regardless of their investment prospects. Likewise, countries with smaller stock markets will have less of an impact, even if they deliver spectacular returns.
Where to Find Data on MSCI EAFE
Performance data for EAFE and many other global indices is available for free at MSCI Barra's website.