The MSCI EAFE index tracks equities in developed economies of Europe, Australia and the Far East (hence the EAFE acronym) and is the simplest way for Canadians to get exposure to markets in Japan, United Kingdom, France, Germany, Switzerland and Australia etc.
Two ETFs, both from iShares, are available to capture the performance of the index: iShares MSCI EAFE Index Fund (Ticker EFA), listed on the U.S. exchanges and iShares CDN MSCI EAFE Index Fund (Ticker XIN), listed on the TSX. Though the EFA is denominated in US dollars, Canadian investors are exposed to the currency rate fluctuations between our dollar and a basket of currencies such as the Euro, Yen and Pound etc., not the U.S. dollar. XIN simply holds the EFA and adds a currency hedge on top of it, so a Canadian investor would capture the returns of the MSCI EAFE index (less fees and expenses) in their respective local currencies. The MER for EFA is 0.35% and 0.50% for the XIN.
My personal preference is to hold the EFA directly because hedging is of dubious value when a basket of currencies are involved. In any given year, the Canadian dollar might gain against the Yen, drop against the Pound, gain against the Euro etc. In fact, while our dollar has appreciated strongly against the greenback in the past five years, it is trading within a tight range against other major currencies.
The exploding popularity of ETFs has attracted competition and the Vanguard group has introduced two ETFs that taken together represent the MSCI EAFE index. The Vanguard European ETF (Ticker VGK) tracks the MSCI Europe Index and the Vanguard Pacific ETF (Ticker VPL) tracks the MSCI Pacific Index. If you invest three-quarters of your money in VGK and one-quarter in VPL, you’ll roughly track the performance of EFA. Why would you bother investing in two ETFs, instead of one? Because the Vanguard ETFs are significantly cheaper and charge a MER of 0.18%. Still, depending on the size of your portfolio, we are talking about relatively small sums of money. The Sleepy Portfolio, for instance, has $20,000 invested in EAFE markets. Switching from EFA to VGL and VPL would save a princely sum of $34 per year, offset by the extra commissions involved in switching.
Update: After this post was published, Vanguard introduced the Vanguard Europe Pacific ETF, an even better option for investing in foreign developed markets.