EAFE Index

What is the EAFE Index?

Commonly referred to as the MSCI EAFE Index, this one is the oldest international stock index. Offered by MSCI, the EAFE Index is a stock index that covers Canadian and non-US equity markets.

It caters as a benchmark of performance for substantial international equity markets that have been represented by 21 significant MSCI indices from the Middle East, Australia, and Europe.

Explaining the EAFE Index

The way S&P 500 index displays the performance of small- to large-cap stocks within the US Market. This one has been created to represent the performance of small- to large-cap stocks around the developed regions of Europe, Australasia, and the Far East (EAFE).

It was back in 1969 when this index was developed by Morgan Stanley Capital International (MSCI). It lists 900+ stocks from around 21 countries. This one is a market-capitalization-weighted index. This means that its specific components are weighted as per the market capitalization.

Thus, countries that have the largest stock markets, like the United Kingdom and Japan, will have the most substantial relative weighting in this index. Additionally, changes happening in the market value of large securities will be resulting in a significant move in the index.

The EAFE’s Financial Sector comprises the highest weighting in this index. Below-mentioned is the table that represents sectors in the EAFE index along with their weights.

How is the EAFE Index Considered as a Benchmark?

Asset managers and institutional investors use the EAFE index as a performance benchmark for equity market developed internationally. By comparing the EAFE Index and the performance of funds, a manager can comprehend if there is any value being added in the Portfolio of a client.

Moreover, portfolio managers and investors who are looking forward to a rising diversification level that goes beyond the Canadian and the US equity market can put stocks from the EAFE in portfolios. This can easily be done by buying index-linked financial products.

One such example that can help to track the investment results of this index is iShares MSCI EAFE ETF (EFA). As of Oct. 2019, the EFA holds a net asset of $60.6 billion with an expense ratio of 0.31%.