Visual Risk Analysis Of The MSCI EAFE Index Fund (EFA)

by on May 29, 2013

When it comes to foreign equities exposure, the evolution of the ETF industry has opened many doors for investors, offering everything from hyper-targeted exposure to products that cast a much wider net over the global market space. But with such a vast variety, investors are faced with the question of which type of exposure they want: some prefer products that hone in on a specific country or region, while others favor more broad-based exposure [see Single Country ETFs: Everything Investors Need To Know]. 

The popular broad-based iShares MSCI EAFE Index Fund (EFA, A) is a prime example of this dilemma, as this ETF seeks to measure the performance of developed markets in Europe, Australia, Asia and the Far East.

How the EAFA Index Fund Stacks Up Against Region-Specific FundsEFA

The chart below illustrates the differences between risk/return profiles among the biggest EAFA region-specific ETFs and the broad-based EAFE Index Fund (EFA). Note that the risk/return profile is defined by a fund’s 200-day volatility and trailing one-year return, while the respective annual dividend yield of each ETF is represented by the size of each bubble [see Global Titans ETFdb Portfolio]:

The Bottom Line

It is important to note that the chart above is based on trailing returns, and as such, its compositions are subject to changes over time. While there is no universally right choice from the above ETFs, it is important for investors to compare each fund’s underlying strategy to determine which combination of risk and return is appropriate.

While all three of these funds have delivered stellar returns over the trailing one-year period, the Europe ETF (VGK) has managed to outperform EFA and VPL by a rather slim margin. VGK also has a slightly higher dividend yield, though investors will need to take on a marginally higher level of risk. On the other hand, the broad-based EFA offers a relatively attractive risk/return profile, with its one-year return coming in at 32% and its 200-day volatility at 13.45%.

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Disclosure: No positions at time of writing.