After numerous rumors of its emergence, and a waiting period that rivaled Godot, a pure Israel ETF has finally emerged from the big players. iShares launched the iShares MSCI Israel Capped Investable Market Index Fund (EIS). You can get the prospects here, and the fund fact sheet here (pdf file). The iShares page on EIS can be found here.
I recently wrote about an ETF targeting Israel. In “Is a newish ETF a good way to invest in the Jewish state?“ we examined the new SPDR Emerging Middle East & Africa (GAF). The take-away was a bit disappointing as South Africa’s presence in the ETF weighed in at over 60%, and TEVA Pharmaceuticals (TEVA) was a full 9% holding of the fund. This is not a great way to play the Middle East or Africa as South Africa’s overwhelming presence kind of skews this as a South African play with some exposure to banking, pharma, chemicals and tech in Israel.
We’ve been waiting anxiously to see a ‘real’ Israeli ETF and it appears that the iShares MSCI Israel Capped Investable Market Index Fund is a good start. Remember, the First Israel Fund (ISL) and the Amidex35 [AMDEX] also provide access to the Israeli market, but I think investors may have been waiting for an iShares-like product for some more trading liquidity.
Some Important Aspects of the ETF:
This ETF invests in local, Israeli shares - not ADRs. Typically, this is a good thing as some of the interesting things going on in the Israel thesis are taking place on the ground in Israel.
You have exposure to the Israeli shekel which as we’ve spoken about quite a bit lately, has been one of the strongest currencies in the world over the past year. Because the ETF itself is priced in dollars and invests locally in Israel, investors would greatly benefit from the currency exposure in a strengthening shekel environment, and take a hit if (when?) the shekel begins to weaken (which is something the Bank of Israel is currently attempting to do).
This is neither ‘good’ nor ‘bad,’ but there will be movement in the exchange rate that will affect returns one way or another, perhaps even inversely to the performance of the individual stocks that comprise the fund. What does this mean? If the Israeli market, specifically, those companies held by EIS, go up 15% (not a bad year), and the shekel depreciates vis-a-vis the dollar by more than that - add in fees, and you’re looking at a down year.
Teva clocks in at a hefty 25% of total assets. On the Tel Aviv Stock Exchange’s TA-25, Teva is “only” 9% or so of market cap weighting. Still a lot but nowhere near 25%. That’s a lot of exposure to one company and one industry when trying to get exposure to Israel as a market.
The top 10 holding comprise almost 70% of the ETF’s holdings. I assume iShares did this because it needs liquidity in some of the bigger names but this somewhat skews the exposure to the Israeli market. There is a lot of concentration in just a few names, and it overweights health care and financial, and underweights tech and telecom.
Given this concentration, you have the following exposure to Israeli industries:
Health Care 25%
Consumer discretionary 3.6%
Consumer staples 2%
I’m not saying that that the ETF's breakdown is positive or negative, but Israel’s GDP has been solidly around 5% for the past couple of years. That’s interesting, but as a technology investor with exposure to Israel, I’m looking to invest in the sexier, high-tech firms that capitalize on Israeli Ingenuity, not invest in local cellular operators facing 120% subscriber penetration.
That’s NOT to say that someone looking for global diversification won’t find this ETF interesting. They may very well find this ETF as a good way to play the local Israeli economy with exposure to the shekel. However, it’s just not my personal thesis.
Disclosure: The author holds a position in TEVA and numerous Israeli stocks via the Israel Growth Fund, a fund of which his partner, Aaron Katsman, is the portfolio manager.