Historical Returns for the MSCI EAFE Index (1970-2010)

As I have previously written, the Morgan Stanley Capital International, Inc. ("MSCI") Europe, Australasia Far East ("EAFE") Index is the benchmark index for foreign equity markets and is the foreign equity equivalent of the S&P 500 Index. The MSCI EAFE Index measures the equity market performance of developed markets in Europe, Australasia, and the Far East, excluding the U.S. and Canada.

The Index includes a selection of stocks from 21 developed markets, the largest of which are Japan and the United Kingdom. The MSCI EAFE Index has been calculated since December 31, 1969 and is the oldest large cap international stock index.

The charts below (click on the charts for a larger view) illustrate annual and annualized returns in terms of U.S. Dollars for the MSCI EAFE Index between 1970 and 2010. The Index has returned a total of 3,948% over the past 41 years, or an annualized average of about 9.45% per year.

The annualized return of the MSCI EAFE Index between 1970 and 2009 of 9.45% slightly trails the return of 9.99% of the S&P 500 Index during the same time period.

Many investment advisers recommend investing 20-30% of one's equity portfolio in large cap foreign stocks, such as those comprising the MSCI EAFE Index. Vanguard, for example, offers the Developed Markets Index fund and a corresponding ETF (symbol: VEA) that tracks the MSCI EAFE Index.

Historical Returns for the MSCI EAFE Index

The Morgan Stanley Capital International, Inc. ("MSCI") Europe, Australasia Far East ("EAFE") Index is the benchmark index for foreign equity markets and is the foreign equity equivalent of the S&P 500 Index. The MSCI EAFE Index measures the equity market performance of developed markets in Europe, Australasia, and the Far East, excluding the U.S. and Canada.

The Index includes a selection of stocks from 21 developed markets, the largest of which are Japan and the United Kingdom. The MSCI EAFE Index has been calculated since December 31, 1969 and is the oldest truly international stock index.

The charts below illustrate annual and annualized returns in terms of U.S. Dollars for the MSCI EAFE Index between 1970 and 2009. The Index has returned a total of 3,657% over the past 40 years, or an annualized average of 9.49% per year. The annualized return of the MSCI during its first 20 years of existence (i.e., between 1970 and 1989) was an impressive 15.21%, but the annualized return of the Index over the last 20 years (i.e., between 1990 and 2009) was a much lower 4.05%.

A big reason for the subpar performance of the Index since 1990 is the bursting the the Japanese asset/equity bubble that began in 1990. As I discussed above, Japanese stocks comprise a large portion of the MSCI EAFE Index and therefore the horrible performance of the Japanese stock market since 1990 has dragged down overall returns of the MSCI EAFE Index over the past 20 years. However, the performance of the MSCI EAFE Index during its first 20 years of existence does somewhat compensate for its recent under-performance. The annualized return of the MSCI EAFE Index between 1970 and 2009 of 9.49% only slightly trails the return of 9.87% of the S&P 500 Index during the same time period.

Many investment advisers recommend investing 20-30% of one's equity portfolio in large cap foreign stocks, such as those comprising the MSCI EAFE Index. Vanguard, for example, offers the Developed Markets Index fund that tracks the MSCI EAFE Index.



*** Edit - August 27, 2011 ***
I have updated this chart with results through 2010.

1989-2008 Annual Returns for Select Developed Markets

The chart below illustrates annual returns between 1989 and 2008 for select developed foreign markets. The chart shows the returns for the various MS country indices for Australia, Canada, France, Germany, Hong Kong, Japan, Switzerland, and the United Kingdom. As references, the chart also includes annual returns (in terms of U.S. Dollars) for the MSCI EAFE Index of foreign developed markets and for the U.S., as represented by the S&P 500 Index.

Many investors invest at least part of their stock market portfolio in foreign stocks, such as emerging markets and/or foreign developed markets. The most widely followed index of foreign developed markets is the MSCI EAFE Index. As I have previously mentioned, the U.S. Dollar will likely continue to weaken over time versus foreign currencies as a result of ongoing budget and trade deficits.

As shown in the chart below, the MSCI EAFE Index provided a meager cumulative return of about 85.70% between 1989 and 2008, an annualized return of just about 3.14%. The returns of the MSCI EAFE Index were dragged down by the abysmal performance of the Japanese stocks. The MS Japan country index had a cumulative return of -39.51%, or an annualized return of -2.48% during the period tracked.

However, strong performances were realized by some of the foreign developed markets. As shown, the MS Switzerland Index realized an impressive cumulative return of about 648%, or about 10.52% per year. Hong Kong was another strong performer, returning about 569%, or 9.98% per year.

Some of the weaker performances were realized by the United Kingdom and Australia. The MS United Kingdom country Index returned a total of about 268%, or 6.74% per year. The MS Australia country Index, on the other hand, returned a total of about 274%, or 6.83% per year.

U.S. stocks performed well in comparison to the foreign developed markets tracked, beating all of the foreign markets tracked except for Switzerland and Hong Kong. The S&P 500 Index returned a total of about 404%, or about 8.42% per year during the period tracked.

Vanguard Provides a New ETF That Tracks the MSCI EAFE Index

I have previously mentioned that the Morgan Stanley Capital International, Inc. Europe, Australasia Far East index (a.k.a., the MSCI EAFE index) is the "S&P 500" of foreign stocks. Until recently, the best ETF tracking the index was an iShares ETF (symbol: EFA). EFA is a core holding of my Hypothetical Model Long-Term Portfolio.

Accordingly to the iShares website, EFA currently has an expense ratio of about 0.35% and is the largest foreign stock ETF, with about $45 billion in net assets. Although 0.35% is a very low expense ratio, Vanguard has decided to undercut iShares with its own ETF tracking the same index. On July 26, 2007, the new Vanguard Europe Pacific ETF (symbol: VEA) began trading on the American stock exchange. VEA tracks the MSCI EAFE index and has an expense ratio capped at 0.15%.

Vanguard's new offering is welcome by investors and should sell quite well. I look favorably upon the ever-decreasing expense ratios of index-tracking ETFs.

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%.