One of the major pathways for exchange traded fund (ETF) investors to get international exposure is by investing in the MSCI Australasia Far East Index, or the EAFE. This famous benchmark dates back to 1969, and tracks 85% of the world’s developed markets besides the Americas.
Eric Uhlfelder for Advisor Perspectives reports that this index is also market-cap weighted, measures stocks free float, or the measure of a stock’s equity that is actually tradeable. The EAFE is the world scale S&P 500.
Like its U.S. counterpart, the index provides heavier exposure to the world’s largest companies, industries, sectors and national markets. For example, despite the disastrous year commercial banks have had, they still make up nearly 14% of the index. And though the Nikkei Index has done nothing over the past 15 years, more than one-fifth of EAFE is invested in Japanese stocks. So far, the EAFE index is off 14% in U.S. dollar terms.
Despite the hardships of late, EAFE has shown some long-term value, and asset managers continue to seek this index when they want non-discretionary market exposure. Because it focuses on the largest companies, EAFE emphasizes aggregate past performance and underweights the smaller stocks that have been leading the market. Further inflows into EAFE-tracking funds exaggerate these differences.
In the short-term, it has taken a hit along with most global markets. But long-term, such as over this past decade, the EAFE still outperforms the S&P 500.
The S&P is down 17.4% year-to-date, and up 5.8% over the last five years.
Some funds that give exposure:
- iShares MSCI EAFE (EFA): down 22.7% year-to-date; up 11.5% in the last five years
- iShares MSCI EAFE Growth (EFG), down 21.8% year-to-date
- iShares MSCI EAFE Value (EFV), down 22.8% year-to-date
- iShares MSCI EAFE Small-Cap (SCZ), down 29.2% year-to-date
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.