What is the MSCI EAFE?

Published by Thomas Herold in Economics, Investments, Trading

'MSCI EAFE' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The MSCI EAFE is a stock market index. The acronym of EAFE means Europe, Australasia, and the Far East. It was first conceived of as a way to measure the developed equity markets of the world besides Canada and the United States. The manager of this index is MSCI Barra, whose combined indices have over $1.9 trillion in total ETFs, funds, and mutual funds indexed to them. The firm proves to be an investment decision tools provider which owns and manages numerous indices.

This index turns out to be weighted by market capitalization. This means that the securities it tracks and follows are weighted utilizing their various market cap amounts. To this effect, the index lines up all of the stocks in the applicable countries’ investment world according to biggest to smallest using the market cap amounts. The biggest of these (70 percent largest market cap ranked companies) make up the MSCI EAFE Large Cap, a newer index. The biggest 85 percent will comprise the MSCI EAFE Standard. The biggest 99 percent make up the MSCI Investable Market Index, or IMI.

The index considers a basket of the largest stocks taken from the major 21 developed nations’ markets (besides both Canada and the United States) as part of its definition. The index itself has a long history stretching all the way back to December 31st of 1969. This makes it the longest running actually international index of global stocks. In no small part because of this, the index has become by far the most typically utilized and referenced benchmark for the range of foreign stock funds listed within the United States.

The MSCI EAFE index includes 21 different major developed nations and their important largest capitalization companies. Countries which are represented in the index itself include all of the following states: Australia, Austria, Belgium, China, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. This means that fully 15 of the countries whose companies comprise the index are European. These nations are the identical ones included in the MSCI World index minus Canada and the United States.

This EAFE index has become so important that a huge number of the North American based managers of international stock funds employ it as their benchmark for fund performance. The international fund, or I Fund, by the Thrift Savings Plan follows the index in its net form.

There are a number of other funds and ETFs that are based upon this EAFE benchmark. iShares MSCI EAFE is one of them traded on the NYSE Arca exchange under the symbol of EFA. It represents the fourth biggest Exchange Traded Fund on earth. Besides this massive ETF, iShares MSCI also maintains the EAFE Small Cap (traded under symbol SCZ) with only the smaller cap companies. The Core MSCI EAFE fund trades under the symbol of IEFA and utilizes the index’s IMI version. While the fund is much like EFA, the portfolio itself comprises practically all of every relevant nation’s market capitalization. EFA only includes the biggest 85 percent, leaving out the overwhelming majority of the stocks which are small cap.

Another index fund based on this EAFE index proves to be the TIAA International Equity Index Fund. Vanguard runs its Vanguard Developed Markets Index Inv mutual fund as well as its Vanguard FTSE Developed Markets Exchange Traded Fund. For years the two of them were utilizing the EAFE as their basis and benchmark. Now they have switched over to the London based FTSE Developed ex North America Index. It is much the same as the EAFE only it also brings in companies from South Korea (which would permit the inclusion of companies such as Kia Motors, Samsung, and LG among others).

Because so many ETFs and mutual funds have their basis on the EAFE Index, several different futures exchanges have arranged licensing agreements to trade futures based on the index on their own exchanges. These include the exchanges ICE Futures, ICE Futures Europe, and CBOE Chicago Board Options Exchange.

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The term 'MSCI EAFE' is included in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.