what is the eafe index 
the eafe index is a stock index offered by morgan stanley capital international msci it covers non u s and non canadian equity markets the eafe index serves as a performance benchmark for the major international equity markets and includes companies in 21 countries in europe australasia and the far east east asia the eafe index is the oldest international stock index and is also known as the msci eafe index understanding the eafe indexthe eafe index was created to track the performance of mid and large cap stocks across 21 developed market countries in europe australasia and the far east eafe australasia is an area that includes australia and new zealand the index was launched by morgan stanley capital international msci in 1986 and covers 795 stocks from 21 countries 1the eafe index is a market capitalization weighted index its individual components are weighted according to their market capitalization this means that countries with the largest stock markets such as japan and the united kingdom have the largest relative weighting in the index in addition changes in the market value of larger cap securities will result in a bigger move in the index than changes in the market value of smaller cap stocks countries in the eafe indexthe countries covered by the msci eafe index are shown in the chart below israel was classified by msci as a developed country in may 2010 and added to the eafe index at that time 12composition of the eafe indexas of feb 28 2023 equities of companies listed on japanese exchanges accounted for the index s largest allocation at 21 22 the top four countries in the eafe index following japan include the united kingdom 15 33 france 12 41 switzerland 9 84 and germany 8 49 1the top 10 company listings and their index weights are shown below these companies account for 2 15 trillion in market cap value and approximately 14 of the index s market capitalization 1the table below shows the sectors represented in the msci eafe index and their respective weights advantages and disadvantages of the eafe indexthe pros and cons of the eafe index discussed below relate to exchange traded funds etfs and mutual funds that are designed to track its performance diversification the eafe index is diversified across 21 countries and more than 700 companies so investors in etfs and mutual funds that seek to match the performance of the index can get a well diversified international portfolio conveniently with a single purchase less volatility the performance of the eafe index is less volatile than some other international indices because of its focus on companies in developed countries rather than in developing or emerging market countries so investments that track it should have less volatile performance as well lower costs securities that seek to match the index s performance will be passively managed and thus be able to offer investors lower costs relative to actively managed etfs and mutual funds limited country exposure countries such as china india brazil and russia are excluded from the eafe index therefore investments tracking it will also exclude them and their potentially attractive return opportunities less growth potential the eafe index is focused on 21 companies within developed countries this means that companies in developing and emerging market countries that may offer the potential for growth and appealing returns will be excluded from eafe tracking investments investments based on market cap since the eafe index weights its allocations according to market capitalization funds do the same so fund investments will be most concentrated in the companies of a few countries that may limit potential return diversificationless volatilitylower costslimited country exposureless growth potentialinvestments based on market capeafe index as a benchmarkinstitutional investors and asset managers use the eafe index as a performance benchmark for the international developed equity market by comparing the performance of funds to that of the eafe index a manager can ascertain whether they are adding value to their clients portfolios investors and portfolio managers who want an increased level of diversification beyond the u s and canadian equity borders can include stocks from eafe in their portfolios typically this is done by purchasing index tracking financial products such as etfs an example of an etf that tracks the performance of the eafe index is the ishares msci eafe etf efa efa has net assets of 49 billion and a 0 33 expense ratio as of february 2023 3 other etfs that mirror the performance of the eafe index are ishares core msci eafe iefa and the ishares msci eafe small cap scz etfs eafe vs acwithe msci acwi all country world index represents the performance of the global market the acwi covers more than 2 933 companies across 47 countries 23 developed countries and 24 emerging economies 4 like the eafe the acwi provides a transparent vehicle that can be tracked investors can take advantage of potentially profitable investments in multiple capital markets throughout the world the table below compares the performance of both indices 