🏛️ Developed Markets

Developed international markets — Europe, Japan, Australia, and other advanced economies — offer exposure to stable, dividend-paying companies outside the US. These markets tend to be less volatile than emerging markets but still provide diversification benefits and currency exposure. Understanding the ETF landscape helps you choose the right instrument for your allocation.

The big three: EFA vs VEA vs IEFA

These are the core developed international ETFs. They track similar universes but differ in cost, methodology, and liquidity.

EFA — The liquid benchmark

EFA tracks the MSCI EAFE Index (Europe, Australasia, Far East) — the original international developed market benchmark. It’s the most widely traded and has the tightest bid-ask spreads.

Key characteristics:

• Large/mid-cap focus: ~800 holdings, larger companies only
• MSCI methodology: The index that institutional investors benchmark against
• Excludes Canada: Unlike VEA, which includes it
• Options liquidity: Best options market among developed international ETFs

When to use EFA:

• You need maximum liquidity for large trades
• You want to trade options on developed international exposure
• You’re benchmarking against MSCI EAFE (institutional standard)

The trade-off: Higher expense ratio (0.32%) than alternatives.

VEA — The low-cost leader

VEA tracks the FTSE Developed All Cap ex-US Index and charges just 0.03% — the lowest in the category.

Key characteristics:

• Broadest coverage: ~4,000 holdings including small-caps
• Includes Canada: Unlike EAFE-based ETFs
• FTSE methodology: Slightly different country classifications than MSCI
• Vanguard scale: Massive AUM keeps trading costs low

When to use VEA:

• Long-term buy-and-hold allocation
• You want the lowest possible expense ratio
• You prefer broader small-cap exposure
• Canada inclusion is acceptable (or desired)

The trade-off: Less liquid options market than EFA.

IEFA — The middle ground

IEFA tracks the MSCI EAFE Investable Market Index (IMI) — the same countries as EFA but including small-caps.

Key characteristics:

• MSCI methodology with small-cap inclusion (~2,800 holdings)
• Low cost: 0.07% — nearly as cheap as VEA
• Excludes Canada: Like EFA
• Core series: Part of iShares’ low-cost Core lineup

When to use IEFA:

• You want MSCI exposure (for consistency with benchmarks) but at low cost
• You prefer small-cap inclusion without switching to FTSE methodology
• Long-term core holding

Comparing the three

Geographic breakdown

Developed international markets are concentrated in three regions:

Country concentration

The top 5 countries typically represent 60-70% of developed international exposure:

Regional ETFs — Tactical tilts

If you want to overweight specific regions within developed markets:

Europe

When to use regional Europe:

• You want to overweight Europe vs. Japan
• You have a view on the euro (use HEDJ for hedged)
• You want concentrated large-cap exposure (FEZ)

Japan

When to use Japan ETFs:

• You want to overweight Japan specifically
• You have a yen view (DXJ for hedged exposure)
• You want tactical exposure around BOJ policy

Pacific ex-Japan

When to use Pacific ETFs:

• You want commodity-linked developed exposure (Australia)
• You have a view on Asian developed markets

The EFA/SPY ratio — Key signal

The ratio of EFA to SPY is the primary signal for developed international allocation:

What drives developed market outperformance?

Which ETF for which situation?

Quick reference

Sources