Recently, Vanguard announced that it will be switching the benchmark index for many of its Exchange-Traded Funds (ETF). In an earlier post, we took a closer look at what the benchmark change means for the Vanguard Emerging Markets ETF (VWO) and found a significant difference in past performance. In this post, we’ll take a closer look at the impact of the benchmark change on the Vanguard MSCI EAFE ETF (VEA).

The Vanguard MSCI EAFE ETF (VEA) currently tracks the MSCI EAFE Index, a benchmark that tracks stock markets in developed markets in Europe, Australasia and Far East (EAFE). VEA will shortly start tracking the FTSE Developed ex North America Index. The FTSE index includes a lot more stocks than the MSCI index as you can see from the following table.

FTSE Developed MSCI EAFE Index
No. of stocks 1384 920
Total Market Cap $11.69T $10.26T
Average Market Cap $8.4B $11.15B
Median Market Cap $3.05B $4.9B

The top countries represented in each index look similar but there are two significant differences: Korea, which FTSE classifies as a developed country gets a 5.8% allocation and Hong Kong has a higher weighting of 4.7% in the FTSE Index compared to 3% in the MSCI EAFE Index.

Country FTSE Developed MSCI EAFE Index
United Kingdom 23% 23%
Japan 20% 19%
Switzerland 9% 9%
France 9% 9%
Australia 9% 9%

Perhaps due to the differences in composition and country weightings of the two indexes, there are significant differences in annual returns over the past 10 years as you can see in the table below:

Year FTSE Developed Markets MSCI EAFE Index Delta
2002 -15.1% -15.9% 0.8%
2003 39.4% 38.6% 0.8%
2004 20.8% 20.3% 0.5%
2005 13.9% 13.5% 0.4%
2006 27.6% 26.3% 1.3%
2007 12.8% 11.2% 1.6%
2008 -43.2% -43.4% 0.2%
2009 34.0% 31.8% 2.2%
2010 9.1% 7.8% 1.4%
2011 -12.1% -12.1% 0.0%
Total 171.1% 157.8% 13.3%

Though the FTSE Developed Markets ex North America Index has outperformed the MSCI EAFE Index over the past 10 years, the key point for investors is that the risk-return profile of these two indexes looks pretty similar. Investors holding VEA in their portfolios can expect it to perform the same role it did before: capture the performance of developed markets outside Canada and the United States.

Comparing Annual Returns of Developed Market ex North America Indexes

This article has 15 comments

  1. Nice post CC. Bottom line, VEA will continue to be a great product for capturing market returns outside North America.

  2. Interesting post. I would be interested to hear if the holdings of the FTSE index is a superset of those in the MSCI index — i.e., if all the FTSE index includes everything in the MSCI index, as well as some not in the MSCI index. If not, I would be curious as to why the MSCI has a company not included in the FTSE.

    • Interesting question Raman. The holdings of MSCI EAFE Index Funds is readily available. I was not able to find a holdings list for the FTSE index. I’ll try and obtain it and compare the two.

  3. Small typo in last paragraph: “Though the FTSE Developed Markets ex North America Index has outperformed the MSCI Emerging Markets Index over the past 10 years”…

    You meant MSCI EAFE Index.

  4. I wonder about tax implications if one owns one of these Vanguard ETFs prior to the change in index. Presumably there would be some shares sold and others purchased within the ETF so that it more closely resembles the new index.

    • The good news is that Vanguard says it does not expect any capital gains distributions from this change. However, there will be extra turnover, so trading commissions can be expected to be slightly higher next year.

  5. FYI the “in an earlier post” link links to this same post.

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  8. Hi CC. I’m wondering how a currency change would affect VEA. Any pointers on reading that would explain that? Thanks.

    • I don’t quite understand your question Pessimist. VEA will rebalance its portfolio to match the new index. The currency basket will change slightly but the effect vis-a-vis the Canadian dollar won’t be dramatically different than before.

  9. On a return and cost basis, how has VXUS performed compared to VEA and VWO with the FTSE benchmark? I’m debating whether or not to go for one ETF that may have a small exposure to Canada or two ETFs, which are pure international.

  10. Great analysis! As I was reading through some bigger concerns emerged in my mind in terms of implications for average investors specifically:


    1)Do investors need an understanding of statistics along with financial accounting/investing principles? Most investors and clients I’ve worked with simply will not have the time or could be bothered to dig that deep into the composition of these type of ETF’s.

    2) I’m concerned that most advisors will not drill down to this level for their clients.

    3) How is this type of adjustment any different than a mutual fund that changes managers who has a different philosophy? Is the expectation that investors have to track the minutae of index construction and behaviour? That doesn’t sound like something that a passive/Potato investor would subscribe to. The basic strategy is to allocate portfolio to basic asset classes/broad indexes and rebalance 1-2 times per year. These types of “adjustment” force investors to monitor more closely than necessary.

    3) The claim is the change will lower costs, but a lot of these ETF’s are priced aggressively in terms of costs (e.g. Vanguard’s are as low as 7bp). If they go lower, how do they make money?

    Your doing a great service with your analysis and yes even if the difference in performance between the 2 indexes is about 13%, as you have commented in the past, it can add up pretty fast over the long term. It’s a nice chunk of change to leave on the table.

    I’ve commented recently ( on how wary I’m becoming with ETF’s as the fund companies are putting a lot of marketing into promoting these funds which with their more active nature are becoming more like closet mutual funds with higher fees, yielding sub-par returns. The traditional vanilla based ETF’s which I’m totally a proponent of seem to be getting crowded out. In my time in the mutual fund industry, I’m seeing many of these elements with ETF’s than when I did at the peak of the mutual fund frenzy in the mid-late 90’s. I’m wondering if we are at or nearing a Jump The Shark moment with ETF’s?

    Twitter: @sageinvestors