MSCI EAFE Index: Definition, How It Works, and Investment Considerations

What is the MSCI EAFE Index?

The MSCI EAFE (Europe, Australasia, Far East) Index is a market-capitalization-weighted benchmark that tracks large- and mid-cap stocks across developed markets outside North America. Launched by MSCI in 1986, it provides a widely used measure of international developed-market equity performance.

How the index functions

• Coverage: Approximately 795 stocks from 21 developed-market countries in Europe, Australasia, and East Asia.
• Weighting: Constituents are weighted by market capitalization, so larger companies and larger national markets carry greater influence on returns.
• Focus: Mid-cap and large-cap equities in developed economies; it deliberately excludes the United States and Canada.

Countries included

The 21 developed-market countries in the EAFE Index are:
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

Japan and a few large European markets typically represent the largest share of the index, followed by the U.K., France, Switzerland, and Germany.

Sector and concentration considerations

• Sector exposure mirrors the market-cap structure of developed-market industries; large-cap companies and dominant sectors have proportionally larger weights.
• Market-cap weighting can concentrate returns in a handful of countries or companies, which reduces tilt toward smaller or faster-growing markets.

Advantages

• Diversification: Exposure to dozens of industries across 21 developed countries in a single benchmark or fund.
• Lower volatility relative to many emerging-market indices because it focuses on developed economies.
• Cost-effective access: Many ETFs and passive mutual funds track the index, offering low-cost international exposure.

Disadvantages

• Excludes major emerging markets (e.g., China, India, Brazil, Russia), so it misses potential high-growth opportunities in those economies.
• Market-cap weighting can concentrate holdings in a few countries or large firms, potentially limiting return diversification.
• Less growth potential compared with indices that include emerging markets.

Using EAFE as a benchmark and investment vehicles

Asset managers and investors use the EAFE Index to measure and benchmark developed-market international equity performance. Common ways to gain EAFE exposure include ETFs and index mutual funds that replicate the index.

Examples of ETFs that track or mirror the EAFE strategy include:
– iShares MSCI EAFE (EFA)
– iShares Core MSCI EAFE (IEFA)
– iShares MSCI EAFE Small-Cap (SCZ)

(Fees, assets under management, and fund offerings change over time—check current fund documentation before investing.)

EAFE vs. MSCI ACWI

• MSCI EAFE: Developed markets outside North America (21 countries).
• MSCI ACWI (All Country World Index): Global coverage that includes both developed and emerging markets—many more countries and a broader opportunity set.
  Choosing between them depends on whether an investor wants developed-only international exposure (EAFE) or a combined developed + emerging global allocation (ACWI).

Quick FAQs

• What does EAFE stand for? Europe, Australasia, Far East (MSCI = Morgan Stanley Capital International).
• Does EAFE include China? No; it excludes China and several other emerging economies.
• Are the U.S. and Canada in EAFE? No; EAFE specifically omits North America.

Bottom line

The MSCI EAFE Index is a long-established benchmark for developed-market international equities outside North America. It offers diversified, lower-volatility exposure to many developed economies, but it omits emerging markets and can be concentrated by market-cap weighting. Investors seeking international developed-market allocation commonly use EAFE-tracking ETFs and mutual funds as a simple way to implement that exposure.

Sources (selected)

• MSCI: MSCI EAFE Index documentation
• Issuers of EAFE-tracking ETFs (e.g., iShares)