EFA vs IEFA: Key Differences in Costs, Holdings, and Dividends

Investors looking for international equity exposure often compare EFA and IEFA, two exchange-traded funds (ETFs) that track developed markets outside North America. While both provide access to similar regions, they differ in costs, diversification, and dividend yields, which can impact long-term returns. Understanding these distinctions is essential for selecting the right ETF based on investment goals.

Index Differences

EFA and IEFA track different benchmarks, affecting their composition. EFA follows the MSCI EAFE Index, which covers developed markets in Europe, Australasia, and the Far East but excludes small-cap stocks, focusing on large- and mid-cap companies. IEFA tracks the MSCI EAFE Investable Market Index (IMI), which includes small-cap stocks, offering broader diversification with over 3,700 securities compared to EFA’s roughly 800.

The inclusion of small-cap stocks in IEFA introduces a different risk-return profile. Smaller companies often have higher growth potential but also greater volatility, leading to larger price swings than EFA, which is concentrated in established firms with stable earnings. Small-cap stocks can also shift sector weightings, as industries like industrials and consumer discretionary tend to have a higher proportion of smaller firms.

Country allocations vary slightly. IEFA’s broader index results in slightly higher exposure to countries with more small-cap stocks, such as Japan and the United Kingdom, leading to minor differences in geographic performance when small-cap stocks outperform or underperform large-cap stocks.

Expense Comparison

Cost efficiency is a key factor in ETF selection. EFA has an expense ratio of 0.32%, while IEFA’s is significantly lower at 0.07%. This 0.25 percentage point difference can have a meaningful impact over time.

For example, an investor with $100,000 in EFA would pay $320 annually in fees, compared to $70 for the same investment in IEFA. Over 20 years, assuming a 7% annual return, the higher expense ratio of EFA could reduce total portfolio value by several thousand dollars. This is particularly relevant in tax-advantaged accounts like IRAs, where minimizing costs enhances compounding benefits.

Beyond expense ratios, trading costs also matter. EFA, being the older and more established fund, has higher average daily trading volume, leading to tighter bid-ask spreads. This can reduce transaction costs for frequent traders. IEFA, despite its lower expense ratio, may have slightly wider spreads, though its growing popularity has improved liquidity.

Holdings Allocation

IEFA’s broader scope results in a more balanced allocation across industries, reducing concentration risk in any single company or sector. While both funds have significant exposure to financials, industrials, and healthcare, IEFA’s inclusion of smaller firms leads to slightly higher allocations in growth-oriented sectors like technology and consumer discretionary. EFA leans more toward defensive industries such as consumer staples and utilities.

EFA is more concentrated in large multinational corporations, with its top 10 holdings—including Nestlé, ASML, and Toyota—accounting for a larger percentage of total assets. IEFA, with its broader base, dilutes the impact of any single stock, making it less susceptible to volatility driven by fluctuations in a handful of mega-cap firms.

Both funds use a market-cap-weighted approach, meaning larger companies receive a higher proportion of assets. However, because IEFA includes mid- and small-cap stocks, its average market capitalization is slightly lower than EFA’s. Investors seeking greater exposure to mid-sized businesses may prefer IEFA’s structure, as it includes companies that are still expanding but have outgrown the startup phase.

Dividend Policies

Both funds pay dividends quarterly, reflecting income from the international companies they track. IEFA tends to have a slightly higher dividend yield due to its inclusion of mid- and small-cap stocks, some of which are in regions with higher payout ratios. Additionally, IEFA captures dividends from firms that EFA excludes, slightly enhancing its total income potential.

Dividend withholding taxes also affect the net yield investors receive. Since both funds hold foreign stocks, they are subject to withholding tax rates imposed by various countries. U.S. investors can claim a foreign tax credit on these withholdings, but the process varies depending on whether the ETF is held in a taxable brokerage account or a tax-advantaged retirement account. Investors holding these funds in an IRA or 401(k) may not be able to reclaim foreign taxes paid, reducing their net income.

Trading Volume

Liquidity and trading activity influence transaction costs and execution. EFA, being the older fund, has higher average daily trading volume, leading to tighter bid-ask spreads. This can reduce costs for investors making frequent trades or executing large orders. Institutional investors, in particular, may prefer EFA for its ability to handle significant transactions with minimal market impact.

IEFA, despite lower trading volume, has seen increasing liquidity as more investors recognize its cost advantages and broader diversification. While its bid-ask spreads may be slightly wider, they remain competitive, especially for long-term investors prioritizing lower expense ratios. Additionally, IEFA’s growing asset base has improved its market depth, making it a strong alternative for those seeking international exposure with a more comprehensive stock selection.