MSCI EAFE index performance

The focus on MSCI EAFE index performance comes from the back of our recent post on best index funds for 2015 which highlighted the best performers so far. One distinction of best performing index funds showed that so far international stocks are having a pretty good year.  Domestic stock market returns has been week aside from some specific sectors like housing and homebuilders.

MSCI EAFE Index is one of the largest and popular equity index outside the United States and Canada.The index tracks non US companies in developed markets across Australia, Europe and Asia. Investors can track the MSCI Index through the iShares MSCI EAFE (EFA) and its popularity shows with more than $50 billion total asset under management.

1 year MSCI EAFE Index Performance

5 year MSCI EAFE Index Performance

Since the depths of the financial crises, MSCI EAFE has returned 10% annually in the last 5 years. In the last 12 month the index (and ETF) has return just above 20%. MSCI EAFE tracks the S&P 500 closely on a short timeframe. The index has underperformed the S&P 500 under both timeframe, especially on a 5 year timeframe by almost 50%!

Country Exposure

MSCI EAFE Country Exposure

MSCI EAFE Country Exposure

The country holding shows the index has broad exposure across developed markets.

– The fund components are market weighted with 40% of the fund is spread across Japan and UK (equal weighted funds are sometimes called Smart Beta funds)

– Significant exposure to Europe through France, Germany, Switzerland, Netherlands, Spain, Sweden and Italy.

– Aside from Japan. Most of the Asian economies are still considered to be emerging markets hence MSCI EAFE index has limited exposure through this region. Majority of asian market exposure are through Hong Kong and “other” category which also includes Singapore and China.

– The only region lacking in representation is the America’s but this is understandable given limited developed markets in the region.

Sector Exposure

Pie chart above shows the industry sector of the companies in the index. The index contains around 800 companies. Therefore the performance of the index is not dependent on any one company or group of company performances.

MSCI EAFE Holding Sector Exposure

MSCI EAFE Holding Sector Exposure

The pie chart shows that the index is also very well diversified from the sector perspective. Financial is the largest sector in the index, followed by Industrials, and consumer cyclicals. These 3 sectors make up just above half of the index. The smallest sector is the technology sector at 4% of the index.

The greatest benefit of investing in the other developed markets is that it provides a geographical diversification with considerable safety to a portfolio vs a pure domestic equity portfolio. However given the significant lag in performance, the cost for the diversification is very high. Although past performance is not an indication of future performances, we will be cautious in adding developed market equity exposure to our portfolio at this stage.