Friday, December 09, 2005

The MSCI EAFE index is the "S&P 500" of foreign stocks

ETFs and mutual funds investing in foreign stocks have become increasing popular over the past 3 years or so. For example, the iShares Morgan Stanley Capital International, Inc. ("MSCI") Europe, Australasia Far East ("EAFE") index ETF (symbol: EFA) has attracted some $20 billion+ in assets in just a few years, while the MSCI Emerging Markets index ETF (symbol: EEM) has attracted around $7 billion in assets since its inception in April 2003.

The MSCI EAFE index is the less volatile of the two. The MSCI EAFE index tracks the stocks of foreign developed markets. Accordingly, these stocks should be less succeptible than emerging markets stocks to currency devauations, lawlessness, etc.

Its assets are divided between a number of European, Asian, and Australian stocks. As of the end of June 2005, close to 25% of its assets were invested in UK stocks, 21% were invested in Japanese stocks, 9% were in French stocks, close to 7% were in German stocks, another 7% were in Swiss stocks, and close to 6% were in Australian stocks.

The MSCI EAFE index has slightly outperformed the S&P 500 over the past 10 years, returning about 1% more annually over the past 10 years. We've been hearing much about the inevitable decline of the U.S. dollar relative to foreign currencies lately. In the event that does eventually happen, there's a strong likelihood that foreign stocks will outperform domestic ones. Accoridngly, an ETF or mutual fund tracking the MSCI EAFE index is a good addition to an investor's portfolio.

For those who enjoy dollar-cost-averaging, ETFs may not be the best investment vehicle, seeing as how commissions must be paid to acquire the shares on a stock market exchange. Luckily, however, Vanguard offers a low-cost index fund, the Vanguard Developed Markets Index fund, that tracks this index. The Vanguard fund has a low expense ratio of about .29%.


Anonymous said...

Why doesn't any writer give the way to locate the MSCI EAFE index itself, not just symbols for the etf's and index funds, and ishares? Where do I find the actual index on specific dates so that I can compare my funds to this index?

Jim said...

I cannot locate the index symbol on Yahoo Finance. However, the MSCI Barra website has some historical data for the index that can be downloaded in a spreadsheet:

Anonymous said...

Is there a fund like this that excludes Japan? What would be the impact of excluding Japan?

Jim said...

Anonymous (12/15/2012), I am not aware of an MSCI EAFE Index that excludes Japan. However, the MSCI EAFE Index is formed of a combination of the MSCI Europe and the MSCI Pacific indexes. iShares does offer an MSCI Pacific ex Japan ETF that excludes Japanese equities - the symbol is EPP.

Jim said...

The benchmark Japanese index is the Nikkei 225 Index. The Nikkei 225 Index closed at 38,916 on December 29, 1989. On December 14, 2012, the Nikkei 225 Index closed at 9737, which is about 75% below where it was 23 years ago. Japanese stocks have been a major drag on the returns of the MSCI EAFE and the MSCI Pacific indexes over the past 23 years.