MSCI EAFE Index

The MSCI EAFE Index is an equity index published by MSCI that measures the performance of large and mid-capitalization stocks in developed markets outside North America. MSCI describes it as an index that "captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the US and Canada," and covering "approximately 85% of the free float-adjusted market capitalization in each country." The letters stand for Europe, Australasia and the Far East, the three regions its countries come from. MSCI launched the index on March 31, 1986, and figures for earlier years are back-tested. It is often called simply the MSCI EAFE or the EAFE Index.

Which countries are in it. MSCI's factsheet lists the 21: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. Membership follows MSCI's own market classification, and other index providers do not sort every country the same way, which is why two "developed international" funds tracking different providers' indexes can hold different countries.

What it leaves out. Three omissions shape what an EAFE fund actually owns. Canada is excluded even though, like the United States, it is a developed market; the index's definition simply stops at North America. Every market MSCI classifies as emerging is excluded. And small companies are excluded, because the index targets large and mid caps by covering about 85% of each country's free-float-adjusted value. An investor using an EAFE fund as the whole international allocation therefore has no emerging-market or small-company exposure from it.

How concentrated it is. Twenty-one countries does not mean twenty-one equal parts. Larger stock markets carry larger weights: on MSCI's factsheet dated September 30, 2026, Japan made up 24.87% of the index and the United Kingdom 14.35%, so those two markets alone were close to two-fifths of it. The index's results depend heavily on its biggest markets, and the weights shift as their prices move.

Why currency matters to a U.S. investor. The index's constituents trade in their local currencies, so a version of the index measured in U.S. dollars combines the stocks' local returns with changes in exchange rates. A rising dollar lowers the dollar return of an EAFE fund even when the stocks are unchanged, and a falling dollar raises it. Currency-hedged funds exist for investors who want to remove that effect.

In each of its 21 countries the index holds the large and mid-sized companies that together make up about 85% of that country's free-float-adjusted market value, the value of the shares available to public investors. MSCI publishes the index's returns in more than one currency, and an index fund or exchange-traded fund tries to match the version it tracks.

Take an example with made-up numbers showing the currency effect. Suppose the stocks in the index rise 6% in their local currencies over a year, while those currencies on average fall 5% against the dollar. A U.S. investor's dollar return is about 1.06 × 0.95 − 1, or 0.7%. If instead the currencies rise 5% against the dollar, the dollar return is about 1.06 × 1.05 − 1, or 11.3%. The same stocks produced two very different results for a dollar-based investor, purely because of the exchange rate.

Pros

• A long-established benchmark, launched in 1986, for developed-market stocks outside North America.
• Broad within its scope: hundreds of large and mid-sized companies across 21 countries.
• Index funds tracking it, or very similar indexes, give an investor the large and mid-sized companies of developed markets outside North America in one holding.

Cons

• Leaves out Canada, emerging markets and small companies, so it is not the whole international market.
• Dominated by its largest country markets, Japan and the United Kingdom above all, so it is less evenly spread than the country count suggests.
• Dollar returns include exchange-rate swings that can outweigh the stocks' own performance in a given year.