The iShares MSCI Israel Capped ETF: By The Bootstraps

| About: iShares MSCI (EIS)

Summary

Israel has few natural resources in a region known for its wealthy petroleum export economies.

Israel has built a technology focused services economy, with a globally respected IT sector.

Over the past several years GDP growth has slowed.

For over a decade the Middle East has been the most volatile region on the planet: warfare, revolution, terrorism, repressive dictatorships, decades old feuds, and failed states. Yet, some economies continue to grow and prosper and then, even without energy resources. The State of Israel has built a free market services economy and has done so without significant natural resources. The Israeli economy is a global leader in Information and Bio technologies. Yet, in spite of having a sophisticated service based economy, Israel still faces many economic hurdles.

Data from OED and UN Comtrade

With a population of just over 8 million, Israel has a per capita income of $32,830, in terms of purchasing power parity 2014 U.S. Dollars. However, per capita income growth has been declining since 2010. Per capita income growth has gone from a post global credit crisis 4.08% to 1.41% by the most recent data. Importantly, foreign direct investment as a percentage of GDP has declined from a 2006 high of nearly 10% of GDP to its present 2.2% of GDP. Further GDP itself has been declining over two decades. The post 2008 recovery high reached 5.52%; very respectable by any standard, however, 2014 annualized GDP growth was 2.55%. If one were to assume that declining economic growth was inflation related, they would be wrong. Inflation has been steadily declining since 2008, from an annualized 4.6% to a 2014 low of 0.48%. Hence the Israeli economy seems to be experiencing the same dis-inflation as are many other advanced economies.

Data from the World Bank

The World Bank ranks Israel as 53rd in terms of its 'ease of doing business' index. Israel's top trading partner is its most important ally: the United States. After the U.S., Belgium, Netherlands and Luxemburg (the Benelux group) accounts for nearly 8%. The remainder of Israel's top trade partners are very diversified, globally. As far as export goods, Israel exports pharmaceuticals both packaged and in bulk, refined petroleum and diamonds. This is followed by calibration/measuring instruments, aeronautical equipment/components and integrated circuits.

Data from OED

Hence, the question a potential investor may have is whether this is a 'buying opportunity'. For those investors with some risk capital, looking for capital appreciation and with regular distributions, BlackRock's (NYSE:BLK) iShares offers the MSCI Israel Capped ETF (NYSEARCA:EIS). The fund first traded in March of 2008 and now has over $103 million dollars in net assets with 2.250 million ETF shares outstanding. The three month average volume is over 87,000 shares per day. The fund has 63 holdings, less than the two other Israel focused funds available. The expense ratio is high for iShares at 0.64% and the fund is currently trading at a premium to NAV of 0.53%. The fund's P/E ratio is nearly 15, well below the S&P currently at 21.40 and the fund is non-volatile, having a beta 0.85 times market volatility. The annualized yield is 2.68%; the 12 month trailing yield is 2.54% and after expenses the (SEC) yield is 1.72%.

The fund holds almost equal portions in the Health Care and Financials; just over 27% each. This is followed by its strong point: Information Technologies. The Israel IT sector is a global leader in security software and data protection. The fund does not weight consumer discretionary nor utilities very much. In fact, the total reserve cash holdings is greater the combined discretionary and utility allocation! Also, the fund does not weight energy heavily, an important consideration with energy price still declining.

Data from iShares

Having outlined the Israeli economy and the fund's basic metrics, it's worth taking a closer look at individual holdings. It's also well worth noting that many of the holdings list on the NYSE or NASD as well as the OTC markets.

Financials 28.1722% [19.8568 greater than 1% weight]

Weight

Exchange: Ticker

Market Cap (in USD Billions)

Yield

Payout Ratio

P/E

Debt/ Equity

Bank Hapoalim BM

6.914%

OTCPK:BKHYY

$6.132

2.35%

19.07%

8.15

107.42%

Bank Leumi Israel

6.4359%

OTC:BLMIF

$4.835

0.00%

0.00%

8.10

79.41%

Israel Discount Bank Ltd

2.4187%

OTC:ISDAY

$1.717

0.00%

0.00%

9.73

103.61%

Mizrahi Tefahot Bank Ltd

2.1817%

TA: MZTF

$2.585

0.84%

7.79%

9.33

199.69%

Azrieli Group Ltd

1.9065%

OTC:AZZRY

$4.272

1.89%

42.93%

22.70

60.82%

Averages

3.97%

$3.91

1.02%

13.96%

11.602

110.19%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

Financials less than 1% weight: 8.3154%

Ticker

Weight

Yield

Name

Ticker

Weight

Yield

Gazit Globe Ltd

GZT

0.9794%

5.94%

Migdal Insurance Ltd

TA: MGDL

0.3552%

14.77%

Alony Hetz Properties

TA: ALHE

0.8917%

3.30%

IDI Insurance Company

TA: IDIN

0.327%

5.83%

Airport City Ltd

TA: ARPT

0.7419%

0.00%

Bayside Land Ltd.

TA: BYSD

0.3028%

4.98%

First International Bank of Israel

OTC:FBKIF

0.7404%

2.77%

CLAL Insurance Enterprises Holdings

TA: CLIS

0.2917%

0.00%

Melisron Ltd.

TA: MLSR

0.6982%

3.50%

Menora Mivtachim Holdings Ltd.

TA: MMHD

0.2892%

5.25%

Reit 1 Ltd.

TA: RIT1

0.5868%

5.05%

Africa Israel Properties Ltd

OTC:AFIMF

0.1974

15.82%

Harel Insurance & Finance

TA: HARL

0.5763%

7.49%

Norstar Holdings Inc

TA: NSTR

0.1885

10.60%

Amot Investments

TA: AMOT

0.5101%

5.37%

Phoenix Holdings Ltd

OTC:IPHXF

0.1812%

9.89%

Joel Jerusalem Oil Exploration Ltd

OTC:JOJMF

0.4576%

0.00%

Averages

2.74%

5.92%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

Of the 22 financial holdings, only 5 have a greater than 1% weighting. Four of the top five are banks and one, Azrieli Group is a diversified real estate holding group with both domestic and international assets. However, the company is further diversified by investments in the energy industry, in the manufacturing of petroleum distillates, LPG, electricity production, distribution as well as water desalination, well treatment and wastewater treatment. In the less than 1% holdings Airport City has little to do with airports. It is an international real estate investment company. Joel Jerusalem does engage in oil exploration, but is mainly a real estate investment company. In total, of the 17 less than 1% holdings, 11 are real estate investment/management companies, 4 are insurance companies, one bank (and never mind the name): Africa Israel Properties invests mostly in European real estate.

Health Care 27.81%

Weight

Exchange: Ticker

Market Cap (in USD Billions)

Yield

Payout Ratio

P/E

Institution Owned

Teva Pharmaceuticals Ltd

26.1%

TEVA

$61.548

2.22%

64.45%

29.78

53.08%

Taro Pharmaceutical Ltd

1.6102%

TARO

$6.245

0.00%

0.00%

11.21

12.52%

Neuroderm Ltd

0.1065%

NDRM

$0.291

0.00%

0.00%

NMF

41.32%

Averages

9.27%

$22.69

0.74%

21.48%

20.495

35.64%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

The Health Care allocation is a fund strongpoint, dominated by Teva Pharmaceuticals. However, the other two companies, TARO and Neuroderm, although not having the same brand recognition as Teva, are globally recognized pharmaceutical companies. The latter two do not pay a dividend and perhaps the reason for their light weighting. Note that two have NYSE listing and one has NASDAQ listing.

Information Technologies 20.3429% [17.4288% greater than 1%]

Weight

Exchange: Ticker

Market Cap (in USD Billions)

Yield

Payout Ratio

P/E

Institution Owned

Check Point Software

7.2244%

CHKP

$14.253

0.00%

0.00%

21.07

77.01%

Nice-Systems Ltd

4.5562%

NICE

$3.525

1.08%

42.52%

26.66

0.00%

Mobileye NV

3.4587%

MBLY

$5.879

0.00%

0.00%

124.10

68.90%

Tower Semiconductor Ltd.

1.1029%

TSEM

$0.947

0.00%

0.00%

NMF

0.00%

EZChip Semiconductor Ltd.

1.0866%

EZCH

$0.755

0.00%

0.00%

NMF

0.00%

Averages

3.49%

$5.07

0.22%

8.50%

57.28

29.18%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

Information Technologies less than 1% weight: 2.9141%

Ticker

Weight

Yield

Name

Ticker

Weight

Yield

Cyber Ark Software Ltd

CYBR

0.5772%

0.00%

Ituran Location & Control Ltd

ITRN

0.3833%

5.50%

Orbotech Ltd.

ORBK

0.5675%

0.00%

Sapiens International Corp

SPNS

0.3344%

0.00%

Radware Ltd.

NASD: RDWR

0.3952%

0.00%

Matrix IT Ltd

OTC:RMTHF

0.2628%

5.39%

Wix.com Ltd

WIX

0.3937%

0.00%

Averages

0.42%

1.56%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

Every holding in the IT allocation is either NYSE or NASDAQ listed with only one exception. The most recognizable name is of course Check Point Software; a global brand for digital enterprise security. Mobileye specializes in camera integrated driver assist software; i.e., driverless passenger vehicle technology. In the smaller weightings, Orbotech specializes in electronic component manufacturing solutions. Lastly, Wix.com is the popular a Web-content or Website solutions company, widely used among small business owners and professionals.

Telecom Services 6.7392% [5.3182% greater than 1%]

Weight

Exchange: Ticker

Market Cap (in USD Billions)

Yield

Payout Ratio

P/E

Institution Owned

Bezeq The Israeli Telecommunication Corp

5.3182%

OTCPK:BZQIF

$5.922

7.62%

100.51%

13.02

0.00%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

Telecom Services less than 1% weight: 1.421%

Ticker

Weight

Yield

Partner Communications

PTNR

0.5236%

0.00%

B Communications Ltd.

BCOM

0.3626%

4.22%

Averages

0.44%

2.11%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company website

Israel has a small telecom services sector. Bezeq dominates with over 80% of the sector allocation. One of the smaller holdings, B Communications has an ownership interest in Bezeq, hence there's some overlap in this allocation.

Materials 6.1313%

Weight

Exchange: Ticker

Market Cap (in USD Billions)

Yield

Payout Ratio

P/E

Institution Owned

Israel Chemicals Ltd

2.8569%

ICL

$5.7068

6.72%

69.67%

10.16

0.00%

Frutarom Ltd.

2.4616%

OTC:FRUTF

$2.942

0.19%

24.23%

32.20

0.00%

Israel Corp Ltd.

0.8128%

OTC:IRLCF

$1.268

15.76%

91.74%

3.82

0.00%

Averages

2.04%

$3.31

7.56%

61.88%

15.39

0.00%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

The interesting holding in this sector is Frutarom, a manufacturer of specialty flavors and fragrances. All three holdings in this sector are international, operating mostly in Europe and also having some fertilizer manufacturing assets in the U.S.

Industrials 4.4493% [2.7331 greater than 1% weight]

Weight

Exchange: Ticker

Market Cap (in USD Billions)

Yield

Payout Ratio

P/E

Institution Owned

Elbit Systems Ltd

2.7331%

ESLT

$3.625

1.73%

32.33%

19.96

0.00%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

Industrials less than 1% weight: 1.7162%

Ticker

Weight

Yield

Name

Ticker

Weight

Yield

CaesarStone Sdot-Yam Ltd

CSTE

0.6243%

0.00%

Plasson Industries Ltd

TA: PLSN

0.1151%

2.04%

Shikun & Binui Ltd

TA: SKBN

0.4037%

7.29%

Kornit Digital Ltd

KRNT

0.0841%

0.00%

Electra Ltd.

TA: ELTR

0.3032%

3.59%

Averages

0.29%

2.72%

Shapir Engineering & Industry

TA: SPEN

0.1858%

3.38%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

Defense contractor Elbit Systems is the largest holding. Having a defense contractor in any fund is to be expected. However, there are also a few really unique niche industrials in this case. For example, Caesar Stone is a manufactures and internationally distributes quartz slabs made by a unique process resulting in a popular interior decor counter top application. Kornit Digital occupies a unique niche providing digital printing solutions for the garment industry, using their own proprietary inks.

Something needs to be pointed out here that's common to Israeli industry. Because of the absence of natural resources, economic growth originates from consumer demand, foreign capital investment and domestic high tech innovation. This is demonstrated in the fund many times: in this sector, in information technology and in pharmaceuticals as well.

Energy 2.8989%

Weight

Exchange: Ticker

Market Cap (in USD Billions)

Yield

Payout Ratio

P/E

Institution Owned

Paz Oil Co. Ltd

1.072%

OTC:PZILY

$1.575

6.73%

78.36%

11.63

0.00%

Delek Group Ltd

0.9957%

OTC:DLKGF

$2.032

6.32%

NMF

NMF

0.00%

Oil Refineries Ltd

0.6355%

OTC:OILRF

$1.320

0.00%

0.00%

14.09

0.00%

Naphtha Israel Petroleum

0.1957%

TA: NFTA

$0.438

0.00%

0.00%

95.34

0.00%

Averages

0.72%

$1.34

3.26%

26.12%

40.35

0.00%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

Energy counts for just under 3.5% of the fund and mostly petroleum refining. Paz Oil controls 30% of Israel's distillate and fuel distribution market. Paz also owns over 30% of the downstream market via its own chain of filling stations. Delek Group is a global energy company covering the entire energy channel: from drilling and exploration to retail distribution. What might seem like a unique feature, water desalination, is quite common in several Industrial sectors and this is to be expected in this arid region: water is a valuable commodity. Israeli's Mediterranean shoreline is an important water resource.

Consumer Staples 2.3011% all less than 1% weight

Ticker

Weight

Yield

Strauss Group Ltd

OTC:SGLJF

0.8323%

1.70%

Osem Investments Ltd

OTC:OSEMF

0.7541%

2.74%

Rami Levi Chain Stores Hashikma

TA: RMLI

0.3808%

2.60%

Shufersal Ltd

OTC:SHUFF

0.3339%

0.00%

Averages

0.58%

1.76%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

Consumer Discretionary 0.8021% all less than 1% weight

Ticker

Weight

Yield

Delek Automotive Ltd

TA: DLEA

0.4755%

20.16%

Delta Galil Industries Ltd

OTC:DELTF

0.3266%

2.11%

Total Weight/Average Yield

0.40%

11.14%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

Both consumer staples and discretionary occupy an extremely small portion of the fund in spite of having global companies such as Delta Galil which manufactures, markets and distributes private label apparel for Marks & Spencer (OTCPK: OTCQX:MAKSY), Target (NYSE: TGT), Walmart (NYSE: WMT), Calvin Klein, Nike (NYSE: NKE) and many others. Food distributer Osem Investments is majority owned by Nestlé (OTCPK:NSRGY). All four consumer staple holdings are in the retail food market subsector.

Utilities 0.2398%; one holding

Ticker

Weight

Yield

Kenon Holdings Ltd

KEN

0.2398%

0.00%

Click to enlarge

Data from Reuters, Yahoo!, Google, and company websites

Among the smallest holdings of the fund is Kenon Holdings. However, this is the utility holding portion of the group of the same name which is headquartered in Singapore. In its entirety, Kenon Holdings Ltd is a diversified industrial; it holds a 50% ownership of Chinese auto manufacturer Qoros as well as a container shipping company, a semiconductor manufacturer and other utilities.

Click to enlarge

This concludes a brief overview of the fund and its holdings. As the price/distribution chart demonstrates, the fund has consistently produced distributions since its March 26, 2008 inception. This particular fund is a fair generalization of the Israeli economy and the most concise with a just 63 well selected holding (corresponding to the MSCI index). It should be noted that a 'capped fund' is an IRS requirement applied to many funds. It

...limits the weight of any single component to a maximum of 25% of the Underlying Index. Additionally, the sum of components that individually constitute more than 5% of the weight of the Underlying Index cannot exceed a maximum of 50% of the weight of the Underlying Index in the aggregate...

Lastly, the fund is passively managed.

Annualized Returns

1 Year

3 Years

5 Years

10 Years

Inception

March 2008

EIS Total Return

7.13%

7.97%

-1.55%

*********

2.29%

EIS Shares

8.01%

7.74%

-1.67%

*********

2.28%

MSCI Israel Index

8.32%

12.01%

-1.70%

2.15%

*********

Click to enlarge

Data from iShares and MSCI

There are very few ways to invest in the Middle East without involving petroleum. This is clearly one way. Israel has an advanced innovative, economy that is well clear of the volatile energy sector. The design of Israeli economy links it strongly to the global economy. It seems more likely than not that the recent slowing of Israeli GDP growth is due to a slowing global economy. However it should be noted that the ETF price is just off its recent highs but well off its all-time high. It would be best to enter if a general market correction provides the opportunity to establish an entry position and then follow up by dollar cost averaging.

Hence, if the investor has a longer term view and considers this as an investment in a well-founded, innovative and technologically advanced economy, currently going through a normal business cycle the rewards over time may well be worth the short term risks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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