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Understanding the MSCI EAFE Index

The MSCI EAFE tracks international markets excluding the U.S. or Canada. We explain how it works and how to invest in it here.

Market indexes track various segments of the world’s economy, such as domestic, foreign, or from different sectors. In many cases, these indexes are the basis for professionally managed mutual funds and exchange-traded funds (ETFs) that investors can add to their portfolios. One that investors often use is the MSCI EAFE, a benchmark that includes stocks from more than 20 developed countries, not including North America.

In this article, we’ll explain what the MSCI EAFE index is and how it’s weighted. Additionally, we’ll discuss what types of companies it holds, including a list of its top ten constituents, and which countries it includes. Finally, you’ll learn some common ways to invest in the index.

Key Takeaways

  • The MSCI EAFE comprises stocks from 21 international markets, including Europe, Australasia, and the Far East.
  • The MSCI EAFE doesn’t include the U.S., Canada, China, Russia, India, or Brazil.
  • The EAFE uses a market cap weighting system, meaning that larger companies hold more influence over the index.
  • Investing in the MSCI EAFE is possible via index funds, mutual funds, and ETFs.

What Is the MSCI EAFE?

The Morgan Stanley Capital Indices (MSCI) EAFE is a well-known market index that tracks mid- and large-cap stocks in 21 developed markets worldwide, excluding countries such as the United States, Canada, and China. Specifically, it includes stocks from Europe, Australasia, and the Far East, making up the acronym it’s commonly known by.

The EAFE index uses a market capitalization (cap) weighting system. This means that the stocks with the highest value of outstanding shares — or market cap — hold the most weight or influence over the index’s value. According to MSCI’s brochure for the index, the EAFE is weighted as follows:

  • 70% large-cap stocks
  • 15% mid-cap stocks
  • 14% small-cap stocks

Because the MSCI EAFE exclusively focuses on countries other than those in North America, many investors and financial experts use it as a means of tracking international markets. Similarly, they also use it as a means of diversification by adding foreign companies to their portfolio.

MSCI EAFE Index Composition

The EAFE index comprises 766 companies from various sectors and international origins, with some of its biggest coming from Switzerland, Germany, Japan, and the United Kingdom. Some of the common sectors within it include health care, technology, and consumer discretionary stocks.

As listed on MSCI’s EAFE fact sheet, here were the top ten constituent companies in the index in descending order of weight as of May 31, 2024:

Novo Nordisk BDenmark2.60%
ASML HoldingNetherlands2.25%
AstraZenecaUnited Kingdom1.42%
ShellUnited Kingdom1.37%
Toyota Motor Corp.Japan1.35%
LVMH Moët HennessyFrance1.30%
Roche Holding AGSwitzerland1.06%

Which Countries Are in the Index?

As mentioned, the EAFE index doesn’t include several large countries, most notably the U.S. and Canada. Interestingly, however, the EAFE also doesn’t include China, Russia, South Korea, or India, despite including other countries in Australasia, such as Japan and Australia.

Instead, the EAFE includes stocks from the following 21 developed countries:

  • Australia
  • Austria
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Hong Kong
  • Ireland
  • Israel
  • Italy
  • Japan
  • The Netherlands
  • New Zealand
  • Norway
  • Portugal
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • The United Kingdom

How to Invest in the MSCI EAFE

As noted, the MSCI EAFE’s exclusion of American markets often presents a strong opportunity for investors to diversify their holdings. However, though it’s impossible to add the index to your portfolio as an investment, there are several effective strategies for investing in it indirectly.

The most straightforward method of investing in the EAFE index is with index funds, mutual funds, and exchange-traded funds (ETFs). These are professionally managed entities that allow you to own an indirect stake in the companies within the index and, while it can vary, often closely match its overall performance. Some examples to consider include the iShares MSCI EAFE ETF (EFA) and the Fidelity International Index Fund (FSPSX).

An alternative way to invest in the index is by selecting individual stocks of the companies listed in the company within a brokerage account or retirement plan, such as an Individual Retirement Account (IRA) or Roth IRA. In this way, you would use the index as a guide of such to find stocks that may give you exposure to foreign markets. However, keep in mind that this is a difficult strategy, and it wouldn’t likely be feasible to try to invest in every constituent within the EAFE.

As you weigh ways to invest in the EAFE index, it’s smart to consult with a financial advisor. A professional, especially one with investment or portfolio management expertise, would be able to help you understand how the index would fit into your plans and explain its benefits and disadvantages. To find a high-quality expert, consider using this free matching tool, which will present you with up to three vetted options near you.

Frequently Asked Questions

What is the all-time high for the MSCI EAFE?

The most recent all-time high for the MSCI EAFE index occurred on August 29, 2021, when it closed at 2,389.45.

What are the advantages of investing in the MSCI EAFE?

While the decision to add a version of the EAFE to your portfolio will depend on personal factors, there are two key benefits of investing in it. The first is that it offers an opportunity to gain some exposure to a wide variety of securities in other countries of varying sectors and geographical locations. These may perform differently than domestic stocks and be prone to different risks.

Another advantage of the EAFE is that it can be less volatile than other indexes. Because MSCI carefully curates the list of countries, with the requirement that they must be developed, the stocks in the index are more likely to be from stable markets. If a country doesn’t make the cut to be classified as developed, MSCI will remove it from the index and re-classify it as either emerging or developing.

What is the disadvantage of investing in the EAFE?

A potential drawback to consider about the EAFE is that it only focuses on a specific subset of markets. Because of this, you may not get the variety you bargained for if your goal is to invest in international securities from large countries like China, Russia, or India. Rather, you must rely on the MSCI’s criteria for what developed countries belong in the index.