Over my entire career, the only international equity fund offered in my retirement plan has been a fund that tracks the MSCI EAFE. For those of us wishing to invest for maximum diversification, this represents a problem — that index covers less than 60% of the total international stock market! Perhaps the most prominent example of this issue is the “I Fund” offered in the Thrift Savings Plan (TSP). The TSP is a 401k-like plan available to US federal employees, and the largest defined contribution plan in the world.
Recently, the TSP was on a path to shift the I Fund to track a more complete international index later this year, but that move was delayed indefinitely. So for now, TSP investors (or anyone else with a retirement plan that has similarly restricted offerings) will need to approximate a total international fund by purchasing the missing components in their other investment accounts. This involves a bit of research and a dive into index fund compositions, so I figured that I’d share my findings and methodology to help anyone facing a similar issue.
What is the MSCI EAFE?
From index-maker MSCI, the EAFE index is an abbreviation for “Europe, Australasia, and the Far East.” It includes stocks domiciled in 21 different countries from the aforementioned regions. Here’s what the constituent countries look like on a map:

Clearly there’s a lot missing in terms of the number of countries represented in this index. Of course, that sounds more sensational than it really is due to the fact that said countries represent the majority of the international market capitalization, but there’s a good reason to care about what’s missing from the EAFE. For starters, it only includes large and mid-cap companies from those 21 countries.
Why you should care about total international
As I already mentioned, the MSCI EAFE covers less than 60% of the total international stock market. Since the US is about half the world market capitalization, a portfolio using the MSCI EAFE as its only international holding is missing out on roughly 20% of the world market cap. Missing components from the MSCI EAFE include:
- Emerging markets
- All small-cap stocks from the countries included in the EAFE
- Canada
- South Korea
Previously, I’ve stated that I firmly believe that the most reliable investment strategy is to own a small piece of every publicly traded company in the world. While you can get very close to this with a total world equity fund like VTWAX (or a total US fund plus a total international fund), using the MSCI EAFE as your only international fund does not provide as much diversification. You’re missing over 40% of the international market cap — maybe not even knowingly.
To meet my investment objectives, I need to emulate a total international fund by using an MSCI EAFE fund as the core holding, and adding back the missing components in their proper ratios. Let’s do some research and a bit of math first, and later I’ll share a couple tips that can help make your life easier if you have to implement this strategy in your portfolio.
Have enough assets outside of your 401k/TSP? You probably don’t need this article.
I am a firm believer of not adding complexity to investing where it isn’t warranted. My goal is to hold US and international equities at world market capitalization weights, which is roughly 55% US and 45% international. If I had half of my assets outside of my 401k, I would simply invest only in a total US stock fund in my 401k, and a total international fund in my IRA and brokerage accounts. If you can ignore the MSCI EAFE fund completely and still meet your desired asset allocation, that’s clearly preferable.
However, for many people on the path to FIRE and especially those just starting out, their 401k represents the majority of their savings capacity. Currently my 401k balance is about 80% of my entire invested portfolio. Until very recently, I simply wasn’t saving enough to do anything other than max out my 401k and IRA. So for situations like that, this strategy is certainly warranted.
Finding the ratios for our component funds
We’re potentially looking at holding five funds to emulate total international — the four missing components, plus the MSCI EAFE (or I Fund) itself. That’s a lot of added complexity to deal with, since in an ideal world I’d hold just two or three funds to include US and international equities, and maybe a total bond fund.
I believe that adding back just emerging markets and small-cap stocks for a three-fund international approach is “good enough” for most people. However, in the interest of completeness I’ll detail the full methodology so you can decide to implement whichever you’d like.
Small-cap stocks
Because there’s many different definitions of what constitutes a “small cap” stock, your results for this question may vary. Each index provider seems to use a different yardstick. Since our foundation will be built from the MSCI EAFE, let’s use their methodology.
The MSCI EAFE is a large and mid-cap index which covers approximately 85% of the market cap in its constituent countries. It’s reasonable to assume that the leftover 15% is our desired allocation to small cap stocks. Indeed, this number is close to what a couple other sources that I checked came up with.
My preferred investment choice here is the Vanguard FTSE All-World ex-US Small-Cap Index Fund (VFSAX).
Emerging markets
This is the largest missing component. Looking at the composition of a flagship total international fund like the one Vanguard offers, we can see that emerging markets accounts for 24.7% of the fund. Since this is a total international fund, it’s reasonable to assume that percentage is very close to the international market capitalization of emerging markets.
My preferred investment choice here is the Vanguard Emerging Markets Stock Index Fund (VEMAX). However, we’ve got our first issue related to overlapping exposure. The ex-US small cap stock fund we selected above already has some emerging markets exposure, 22.2% of it.
22.2% of our small cap allocation (15%) is 3.33%. If we subtract 3.33% from the 24.7% allocation we were going to use for emerging markets, that mitigates some of the overlap. We’re left with a desired allocation of 21.37% to emerging markets.
Canada
Again taking a look at the composition of Vanguard’s Total International Stock Index (VTIAX), we see that Canada accounts for 6.5% of the fund, and thus 6.5% of the total international market cap.
Once again though, we’ve got some overlap. Canadian stocks are 14.2% of my selected small cap fund. So we’ll subtract that overlap from Canada’s market cap percentage to attempt to mitigate this. 14.2% of 15% is 2.13%, leaving a further 4.37% recommended allocation to Canada.
Here’s where the “good enough” cutoff that I was mentioning comes in. If you’re 100% equities at world market cap weight, 45% of those are international. This means that at most, adding an additional fund for Canada would account for 2% of your total portfolio. Hardly enough to make a difference.
For those who do want to pursue the completionist approach, my recommended investment is the SPDR Solactive Canada ETF (ZCAN). It has a reasonable expense ratio of 0.14% and covers 85% of the Canadian stock market via large and mid-cap stocks, perfectly completing our small-cap fund.
South Korea
For this one, it depends which emerging markets index you choose. MSCI classifies South Korea as an emerging market. FTSE classifies it as a developed market. Which means that if you invest in an emerging markets fund that tracks an MSCI index (like the Fidelity Emerging Markets Index (FPADX)), you’ve already got exposure to South Korea and can skip this step.
If your emerging markets fund tracks a FTSE index (like the Vanguard Emerging Markets Stock Index (VEMAX)), you’re missing South Korea from your portfolio. Once again returning to the Vanguard Total International Stock Index (VTIAX), we see that South Korea represents 3.4% of the international market cap.
We again see some overlap with our small-cap fund, which is 4.8% invested in South Korea. Using the same methodology as before, 4.8% of 15% is 0.72%. Any South Korea fund then should comprise 2.68% of our international allocation. Since this is smaller than the Canada portion which I already claimed was negligible, the “good enough” approach would simply ignore it.
The only South Korean fund that I can find with a reasonable expense ratio is the Franklin FTSE South Korea ETF (FLKR). It has a 0.09% expense ratio, while the other options are at 0.60% or higher for what seems to be the same exposure.
The MSCI EAFE (or I Fund) itself
The good news is that this is the easy part. Since we’ve already determined all of our missing components, the MSCI EAFE is just whatever is left over after subtracting those out. 100 – (15 + 21.37 + 4.37 + 2.68) = 56.58%. The MSCI EAFE only covers 56.58% of the total international stock market.
Putting it all together
An investor is now left with two choices: be a completionist, or take the “good enough” approach. For reference, ignoring Canada and South Korea completely means you’re missing out on only about 3% of the world stock market capitalization (versus 7% of the international market cap). Personally, I don’t consider a 3% diversification benefit worth the effort of buying and rebalancing those additional two funds at this stage of my investing career.
Unless you’ve got a mid-7-figure portfolio, the Canada and South Korea funds in those percentages aren’t going to amount to much worth caring about. Our small-cap and emerging markets funds provided most of the diversification from this exercise, so it’s reasonable to just add those. Regardless, I will detail both methods in the interests of catering to those who may be of a different opinion to myself.
The completionist five-fund approach
Just invest in all of the funds (or similar equivalents) at the following percentages that we’ve already determined together:
- 56.58% MSCI EAFE (or TSP I Fund)
- 21.37% Emerging Markets Index (such as VEMAX)
- 15% Small Cap Ex-US Stock Index (such as VFSAX)
- 4.37% Canada Index (such as ZCAN)
- 2.68% South Korea Index (such as FLKR)
The sum of the dollar amount held in all of these funds, divided by your total equity balance in your portfolio should equal your desired allocation to international stocks. Feel free to round off and clean up the percentages however you’d like — it is your portfolio after all!
Tip: If your chosen emerging markets fund tracks an MSCI index (and thus includes South Korea) you can just add the 2.68% from South Korea into your emerging markets allocation for simplicity.
The simpler three-fund approach
This method ignores the Canada and South Korea funds, and is the approach that I personally use, mainly because it’s easier to implement and maintain. The international equities chunk of your portfolio should be allocated as follows:
- 60% MSCI EAFE (or TSP I Fund)
- 24% Emerging Markets Index (such as VEMAX)
- 16% Small Cap Ex-US Stock Index (such as VFSAX)
If you’re investing in US and international equities at roughly world market cap weights (55% US and 45% international), your 401k or TSP can comprise slightly over 80% of your assets and this method will still work. I hold both VEMAX and VFSAX in the appropriate ratios in my Vanguard Roth IRA.
A couple tips
Don’t hold the MSCI EAFE (or I Fund) itself at your preferred international percentage!
It took me quite a while of implementing this strategy in my own portfolio to figure this one out. Think about what happens if your desired US/international ratio is 55/45, so in your 401k or TSP you hold 55% US stocks and 45% MSCI EAFE/I Fund. You then have to go into your Roth IRA or other brokerage account and add the emerging markets and small-cap ex-US funds, which then boosts international stocks higher as a percentage of your portfolio. Now you’re holding more international than you wanted!
You could just invest in more US stocks outside of your 401k/TSP to balance it out, but the entire point of this strategy is to make it accessible to people like myself who don’t have a ton of assets outside of their main retirement account.
The absolute simplest solution then, for those of us stuck having to implement this strategy, is to hold as much MSCI EAFE/I Fund as you need to make that your core international holding across your entire portfolio balance. And then figure out what percentage of your 401k or TSP that represents. (If you don’t want the MSCI EAFE/I Fund to be your core international holding and want to hold as little of it as possible, check out Option 2 in the below section!)
For example, say that my desired US/international allocation is 55/45. I’m following the simple three-fund total international approach outlined above, so I need 60% of my international holdings to be MSCI EAFE. In my 401k/TSP then, I should actually only be holding 27% of my total equity allocation (not 401k/TSP account balance) in the MSCI EAFE/I Fund (0.45 x 0.60 = 27%).
What percentage of your 401k/TSP to allocate to the MSCI EAFE/I Fund to reach that 27% total — or whatever equivalent number you arrive at for your own desired allocation — will depend on what percentage of your assets that account makes up. For a $100k portfolio with 80% of your assets in the 401k/TSP, that comes out to a 33.8% allocation to the MSCI EAFE/I Fund within the 401k/TSP ($27k total desired in the MSCI EAFE, divided by $80k account balance).
If you hold an allocation to bonds, just determine what you want that to be first in dollar terms, and then subtract it from your total portfolio balance before doing these calculations. That will get you the correct percentages for your desired equity allocation. Sometimes I get carried away when writing and forget that not everybody is 100% equities like myself, so here’s my effort to accommodate!
These numbers will shift slowly over time, and you will need to rebalance your portfolio and contribution percentages every so often to stay on track. But it’s certainly not something you need to obsessively check. I peek at it every 6 months to a year and see if any tweaks are needed.
Invest all of your excess funds as simply as possible to maintain your asset allocation.
Option 1: MSCI EAFE Off Total Portfolio Balance
My first thought experiment on this topic was investing in the MSCI EAFE based on your total portfolio balance (and not just 401k/TSP balance). Once you’ve also bought the emerging markets and small-cap ex-US funds, you’ll be at your desired international allocation across your whole portfolio. All of your other money, across all accounts, then needs to go into US stocks to complete the remainder of your asset allocation. Every dime in your Roth IRA and other brokerage accounts that is not specifically invested in the emerging markets and small-cap ex-US stock funds that are needed to follow this strategy should go into a total US stock market fund. One of the best out there is the Vanguard Total US Stock Market Fund (VTSAX).
Option 2: Two Buckets Strategy
There’s a second option here too which is to split your portfolio into two “buckets” of money. The first bucket would contain your 401k/TSP, plus just enough money in a Roth IRA or taxable account to purchase the completing funds (about a quarter of your 401k/TSP balance). The second bucket would include all other invested monies, and just be invested in something like VTWAX, a total world equity fund. Since each bucket is approximating (or directly invested in) a total world equity fund, your overall portfolio averages out to do just that as well.
How to decide between Options 1 and 2?
So between Option 1 and Option 2, the main differences are that Option 2 will result in the minimum amount of MSCI EAFE/I Fund that you need to get a total world portfolio across all accounts, whereas with Option 1 you will also get a total world portfolio, but you’ll have to hold more MSCI EAFE/I Fund to get there. Option 1 is easier to deal with accounting-wise. Option 2 may be worth the squeeze if for example you’re slowly adding a lot of assets to taxable accounts, plan to roll your money out of the TSP at some point, and in the future you don’t want to balance your portfolio around a taxable account filled with US stocks which would be the result of Option 1.
When I started following this strategy, Option 1 worked well for me since I only had a 401k and Roth IRA. As my portfolio has grown enough to include a taxable investment account and I began to consider future tax implications, I now implement Option 2.
There’s really no reason not to just go with Option 2, since math can be automated, especially if someone else has already done the work, namely making…
A free spreadsheet tool to help you out!

Here’s a quick spreadsheet that I threw together for the simple three-fund approach to approximating a total international fund using the MSCI EAFE. Enter your investment balance information in the orange cells (and modify the yellow allocation percentage cells if desired) and it will spit out results. Specifically, the minimum assets required outside of your 401k/TSP to implement the strategy, what percentage of your 401k/TSP assets to invest in the MSCI EAFE or I Fund, and finally the dollar amount of the completing funds to hold in your external accounts.
Again, if you’re a bond holder make sure to subtract your bond allocation (in dollar terms) from your account balance, and note that the resulting percentage of MSCI EAFE or I Fund to hold will be properly adjusted based on your bonds percentage input! If you have no bonds, just leave this at zero.
If you’re choosing Option 1, all of your remaining funds in your 401k and external accounts (other than the emerging markets and small cap ex-US stock amounts as calculated by the spreadsheet) will need to be invested in US stocks to complete your asset allocation and mirror a total world stock portfolio.
The spreadsheet by default is set up for Option 2: Two Buckets Strategy as outlined in the above section since this is what I use and recommend. All of your remaining funds in your 401k/TSP should go into US stocks. Outside of your TSP, excess funds beyond the required amounts of emerging markets and small cap ex-US stocks as calculated by the spreadsheet should be invested in a total world equity fund!
Access it here on Google Sheets. Anyone can download it as an .xlsx or .ods to edit locally on their machine. Or if you have a Google account, you can go to File → Make a copy to add it to your Drive and edit in the cloud.
Great article. I also look to replicate the entire global market with my portfolio, and have done similar research as the TSP is my primary vehicle. The only thing I wanted to mention for those using Franklin Templeton’s Korea ETF, is that it doesn’t include small caps. There is no need for the overlap calculation with VSS, because only 0.1% of VSS’s holdings overlap with FLKR. Likewise, if you use FLCA for the Canada allocation, there is 0% overlap with VSS.
Hey Jacob, glad you enjoyed the article and thanks for the tip!
There is talk of a mutual fund window coming to the TSP in Summer 2022, claiming to offer access to over 5,000 investment funds. Here’s hoping that comes through as planned and TSP investors will be able to access a low-cost total international fund like those offered by Vanguard and Fidelity through this feature.