MSCI EAFE index

The MSCI EAFE (Europe, Australasia and Far East) index is a capitalization weighted index of 22 national stock markets outside the North American stock markets. The index has been calculated by MSCI Barra since December 31, 1969. The index is frequently used as a benchmark for measuring international developed stock market investment portfolios. The EAFE Index is tracked by numerous index and exchange traded funds.

Index constituents
The twenty two nations included in the MSCI EAFE index include:

Index returns
The following table provides the historical performance of the MSCI EAFE index from the 1970 inception to year end 2012. Both nominal and real returns are provided. The first chart shows historical nominal returns, real returns, and standard deviations; the second chart shows constituent country weightings in the index. The second tab provides a chart of annual nominal and real returns. The fourth tab provides a chart of nominal and real growth of capital.

Correlations
The MSCI EAFE index, measured by annual returns, has exhibited, on average, positive correlation with broad equity indexes (the Wilshire 5000 index of U.S stocks and the MSCI Emerging Market stock index), and non-correlation with the US Barclays Aggregate Bond index, when viewed over the entire span of measurement periods. .

The periods of measurement break down as follows:
 * MSCI EAFE- Wilshire 5000 1970 - current
 * MSCI EAFE- MSCI EM 1989 - current
 * MSCI EAFE- Barclays US AGG bond 1976 - current

For an investment portfolio, the advantages of combining asset classes with consistent low correlations are an increase in diversification and a potential lowering of portfolio volatility.

However, correlation between asset classes shifts constantly, as asset classes become more and less correlated with each other over time. The table below shows the range of correlations over rolling five year periods (annual returns) for each pair of assets.

The MSCI EAFE index has displayed the following tendencies:


 * Over the 1970 - 2012 span the MSCI index has trended towards higher correlations with US index returns. Goetzmann/, Li, and Rouwenhorst note that equity markets have historically grown more positively correlated during periods of greater integration of international economies (as in the late nineteenth  and late twentieth centuries). The MSCI EAFE index has existed over a period marked by increasing globalization of market economies.


 * As the recent 2008 market downturn indicates, equity asset classes tend to become more positively correlated during bear markets.

Articles

 * Basics of Asset Allocation, (Part 2 of 2), Rick Ferri, background