A Look at EAFE Index (EFA) ETF

TigerFox

By Dan Moskowitz | April 09, 2015 AAA |

The iShares MSCI EAFE is a unique ETF with exposure to high quality companies, but is it likely to be a good bet going forward?
The iShares MSCI EAFE (EFA) exchange-traded fund (ETF) tracks the performance of the MSCI EAFE Index. The index tracks large-cap and mid-cap equities in developed markets, but has no exposure to the United States or Canada.

EFA trades an average of 20.9 million shares per day, which leads to tight bid-ask spreads, a positive. It has a 0.33% expense ratio, which means it’s less expensive to own than most ETFs, where the average expense ratio is 0.43%. Net assets are strong at $53.33 billion. And there’s a 3.67% dividend yield to boot. Furthermore, EFA offers exposure to every sector throughout the broader market, which makes it diversified. (For more, see: The Importance of Diversification.)

It would appear as though EFA is an excellent ETF to consider, especially if you’re bullish on the broader market in the near and perhaps distant future. This might be the case, but just to make sure, let’s take a look at EFA’s top four holdings. These holdings only represent small percentages of EFA, but they’re still the most important. As a side note, this kind of balanced weighting demonstrates broad diversification, which is always a positive.

NESTLE
Nestle S.A. (NSRGF) makes up 1.85% of assets. Its long-term goal is always 5-6% annual organic growth. In 2014 it missed that target, but still delivered 4.5% growth. How to read that number depends on your perspective. On one hand, the company missed its expectation. On the other hand, that expectation is a median line – some years are under that line, some over while others are within that range. What’s impressive is that Nestle has managed to deliver despite a slowdown in emerging markets and the appreciation of the Swiss franc. Nestle reports in Swiss francs, its dividend is paid in Swiss francs and 20% of its debt is held in Swiss francs. But not to fret. Nestle has been dealing with a strong Swiss franc for many years. (For more, see: Nestle a Little Light on Results, Heavy on Valuation.)


Nestle is a strong company that’s capable of delivering growth in a difficult economic environment. This and the next few years aren’t expected to be the company’s best, but it should weather the storm relatively well.

NOVARTIS
EFA's second largest holding, Novartis AG (NVSEF) represents 1.74% of assets. The company develops, manufactures and markets healthcare products. Novartis has been around since 1895. This demonstrates exceptional staying power. As far as other stats are concerned, take a gander at some 2014 highlights:

Total shareholder return: 34% (year-over-year)

Net sales increased 3% (year-over-year)

Core operating income jumped 8% (year-over-year)

13 major approvals in key markets

Reached milestone of 1 billion patients

200 projects in clinical development

Healthcare spending is expected to double over the next decade. Combine that with strong fundamentals and Novartis should be a long-term winner. (For more, see: Interested in Pharmaceutical Stocks? Try Novartis.)

ROCHE HOLDING
Roche Holding AG (RHHVF) provides pharmaceuticals and diagnostics to help detect, prevent and treat disease. It represents 1.47% of holdings. A few 2014 quick facts: (For more, see: Roche, Reloaded.)

Group sales increased 5% (year-over-year/constant-currency)

Pharmaceutical division sales improved 4% (year-over-year/constant-currency)

Diagnostic division sales spiked 6% (year-over-year/constant-currency)

Board proposed 3% dividend increase (only healthy companies propose dividend increases)

TOYOTA
Toyota Motor Corp. (TOYOF) makes up 1.43% of EFA's holdings. For the nine months ending December 2014, revenue increased 5.2% year over year. Operating income grew to 2.1148 trillion yen from 1.8559 trillion yen. The latter was primarily due to currency benefits and cost reductions. Net income grew to 1.7268 trillion yen from 1.5260 trillion yen. Financial services revenue increased 84.4 billion yen. Vehicle sales were down in APMEA (Asia, Pacific, Middle East, Africa) but up in the United States and Europe. (For more, see: How Does the Yen Affect American Finance?)

Looking ahead to fiscal year 2015, Toyota revised its consolidated vehicle sales expectation to 9 million from 9.5 million due to sales trends in each region. Despite the downward revision, Toyota has raised its operating income forecast by 100 billion yen to 2.7 trillion yen thanks to currency benefits and cost reductions. Demand isn’t as high as in the past few years, but thanks to a stellar brand, demand remains high. A weak Japanese yen should favor the company.

PERFORMANCE COMPARISONS
Getting back to EFA, it has appreciated approximately 30% over the past three years. That’s not bad, but it’s not exceptional considering the bull market environment we have witnessed over that time frame. Comparatively, over the same time frame, Nestle, Novartis, Roche and Toyota have appreciated 38%, 91%, 65% and 71%, respectively. Something to ponder. (For more, see: The World's Largest ETFs.)

THE BOTTOM LINE
EFA isn’t the ideal ETF if you’re looking for exposure to developed markets, but it’s far from the worst. You might be better off researching each individual company mentioned above and investing accordingly.

Dan Moskowitz does not have any positions in EFA, NSRGF, NVSEF, RHHVF or TOYOF.

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TAGS:
Diversified Investments Equity ETFs Risk/Return Tradeoff
STOCKS:
EFA, NSRGF, NVSEF, RHHVF


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TigerFox

把EFA做中长线投资，意下如何？