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.
