ASMLF - iShares MSCI EAFE ETF: Dividends From Abroad

2023-11-06 17:56:31 ET

Summary

• iShares MSCI EAFE ETF provides exposure to large and mid-sized companies across developed markets outside the U.S. and Canada.
• EFA has a diverse portfolio with holdings in sectors such as financials, healthcare, industrials, consumer discretionary, and consumer staples.
• The ETF has performed well compared to other developed market indices, but has lagged behind the S&P 500 due to the exclusion of U.S. companies.

Overview

The iShares MSCI EAFE ETF ( EFA ) is an exchange-traded fund (ETF) that provides exposure to a diverse set of large and mid-sized companies across developed markets of Europe, Australasia, and the Far East, hence the acronym EAFE. The fund specifically excludes stocks from the U.S. and Canada, targeting investors looking for international diversification.

EFA's mission is to track the investment results of the MSCI EAFE Index, which encompasses equities from various sectors, with a typical concentration in financials, healthcare, industrials, consumer discretionary, and consumer staples. This sector allocation mirrors the economic composition of the included geographies.

The ETF operates on a passive investment strategy, aiming to match the performance of the MSCI EAFE Index before accounting for fees and expenses. As such, it doesn't include small-cap stocks, instead focusing on the larger and mid-sized companies based on market capitalization.

EFA is known for its high liquidity, as it invests in high-volume stocks, allowing investors to buy and sell shares easily, making it a convenient option for those seeking to tap into developed international markets. The fund is also a frequent choice for investors due to its regular dividend distributions, which are derived from the dividends paid by the underlying holdings. In this regard, the ETF has an annual distribution yield of 2.4% and an expense ratio of 0.32%, representing the annual costs when investing in the ETF. The ETF has assets under management ((AUM)) totaling over $40 billion.

Holdings

iShares MSCI EAFE ETF ( EFA ) holds a diversified portfolio of large- and mid-capitalization equities from developed markets outside of North America. Some of the top holdings in the EFA ETF include Swiss food giant Nestle S.A. ( NSRGF ) , Danish pharmaceutical Novo Nordisk ( NVO ) , as well as Semiconductor giant ASML Holding ( ASML ) . Other significant holdings include Toyota Motor Corporation ( TM ) from Japan and pharmaceutical Novartis AG ( NVS ) from Switzerland.

EFA includes holdings with the largest allocations in Japan (22.85%) , followed by the United Kingdom (15.23%) , and France (11.91%) . Other significant allocations include Switzerland (9.90%), Germany (8.23%), and Australia (7.21%). The fund also invests in a number of other European countries, with the Netherlands (4.18%), Denmark (3.26%), Sweden (3.11%), and Spain (2.63%) rounding out its top ten country exposures. This spread provides investors with substantial coverage of major developed markets outside of North America.

Overall, the ETF includes 798 holdings from 10 different countries, representing a broad diversification. The weighted average market cap of EFA is $83.6 billion, which points to established large-caps mentioned before.

Overall, the ETF has a P/E ratio of 12.17 and a Price/Book (P/B) ratio of 1.66, which is comparably lower than the popular iShares MSCI World ETF ( URTH ), which includes U.S equities and boasts a P/E ratio of 17.9. The ETF is also comparably valued lower than the S&P 500 ( SPY ), trading at a 21.2 P/E.

Performance

Despite investing in different companies and excluding the U.S. and China, EFA compared similarly, as many large-caps from developed regions such as Europe and Asia rebounded from a sell-off at the end of last year. In this regard, the Euro Stoxx 50 index is up 12% year-over-year (YoY), while Japan's Nikkei 225 is up nearly 20% YoY. Australia S&P/ASX 200 rose only 1% YoY.

Nevertheless, as EFA excludes U.S. companies, it failed to outperform the S&P 500, as large technology companies such as Microsoft ( MSFT ) and NVIDIA ( NVDA ) surged over the past year amidst an AI-driven rally.

As briefly mentioned earlier, iShares MSCI World ETF, includes U.S equities, making up some of its largest holdings. The ETF has an annual distribution yield of just 1.74%, yet also a slightly lower expense ratio at 0.24%. Vanguard FTSE Developed Markets ETF ( VEA ) also invests in ex-US equities with nearly identical holdings, such as Nestle, ASML, etc. However, the ETF has a much smaller expense ratio at just 0.05% annually. While 0.32% compared to 0.05% may not seem like much, it makes a big difference for long-term investors. After 20 years, investors will have lost 5.4% in total performance just in fees.

Takeaways

EFA offers exposure to innovative and high-quality businesses in developed and growing regions, making it an attractive investment option. It also provides a stable dividend yield for investors. However, it is important to note that while there may be less political risk from U.S. and China tensions, the heavy reliance on these two markets still creates significant political risks for the revenue of companies within the EFA ETF.

On the other hand, companies from developed nations in Europe and Japan remain relatively undervalued compared to U.S. companies. This presents an opportunity for long-term investors seeking higher exposure outside the U.S. However, for those specifically looking for higher ex-U.S. exposure, the VEA ETF may be a better option due to its lower expense ratio.

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