For investors in the United States, it's pretty easy to get overexposed to domestic stocks. These are the brands that you're most used to and the companies that you see every day. It's easy to load up on what you know. Heck, even Warren Buffett makes that a central theme of his investing.
But you shouldn't forget about international exposure, and exchange-traded funds (ETFs) are some of the best ways to get there. ETFs give you exposure to hundreds or thousands of stocks with the click of a button. And that's why funds like the iShares Core MSCI EAFE ETF (IEFA 0.95%) are so popular.
I actually think IEFA is a perfectly fine fund. But it's not my favorite for international exposure. There's a better option out there in the Vanguard FTSE Developed Markets ETF (VEA 0.62%)
Let's take a look at these two funds.
Image source: Getty Images.
IEFA provides a strong starting point
IEFA tracks the MSCI EAFE Investable Market Index, which is a market-cap weighted index that includes large-, mid-, and small-cap stocks from developed markets outside the U.S. and Canada. (EAFE stands for Europe, Australia and Asia, and the Far East.) Because it also excludes emerging markets, you won't find any stocks from nations like China, Brazil, or India.
In total, IEFA includes 2,605 companies, with the top holdings including ASML, Nestle, Novo Nordisk, and AstraZeneca. The heaviest weighting in the fund is 1.4%, so you know you're getting some serious diversification.
So far this year, IEFA is up 15.2%, which is better than the S&P 500's performance of 3.1%. Its five-year performance is nearly 39%.
With an expense ratio of 0.07%, investors can expect to pay just $7 annually for each $10,000 they invest. Clearly, IFEA is an excellent fund, and it's widely held for good reason.
Why VEA is the better choice
I'm not sure you could call IEFA vs. VEA an apples-to-oranges comparison. It's more like comparing a good apple to one that's a little shinier.
VEA tracks the FTSE Developed All Cap ex US Index. So it gives you access to small-, mid-, and large-cap stocks, in developed companies outside the U.S. But unlike IEFA, it also includes Canada and South Korea. That's why it tracks a whopping 3,839 companies, giving you even more diversification than IEFA.
Top holdings also include ASML, Nestle, Novo Nordisk, and AstraZeneca. But you also find Toyota Motor in the top 10 of the VEA. No stock has a weighting of more than 1.3%.
VEA also gives you slightly better returns. It's up nearly 16% so far this year and 40% in the last five years. And you get an even lower expense ratio of 0.03%, which means you're only paying $3 annually for each $10,000 you're investing.
| Metric | IEFA | VEA |
|---|---|---|
| Expense ratio | 0.07% | 0.03% |
| Year-to-date return | 15.2% | 15.9% |
| Five-year return | 38.7% | 40.3% |
| Equity holdings | 2,605 | 3,839 |
| Index tracked | MSCI EAFE Investable Market Index | FTSE Developed All Cap ex US Index |
Data source: Morningstar, author research.
The bottom line
There may be times when you want to invest in IEFA rather than VEA. For example, VEA might not be suitable if your portfolio already includes significant Canadian holdings, or is overweight in energy and natural resources, a sector where Canadian companies are prominent.
But in general, if you're looking for the efficient, affordable way to get international exposure from developed countries, VEA is the better choice. It's slightly cheaper, it offers more diversification, and it outperforms the IEFA. If you're building a set-it-and-forget-it portfolio, those little differences can add up in the long run.
