New iShares Israel Fund; Heavy On Teva, But Worth a Look

Israel's economy grew at a brisk 5.3% pace in 2007. However, most expect that the U.S. slowdown will affect Israel's future growth prospects.

Not that timing seems to affect the introduction of new ETFs. Barclay's has just put forward the iShares MSCI Israel Index Fund (IES).

By exchange-traded fund standards, the .74% expense is much higher than one might have hoped for. ETFs primary advantage over mutual fund alternatives has always been the cost. I might have wanted to see this introduced at .5%, but hey... it's Barclay's call.

Moreover, there aren't a whole lot of diversified options for investing directly in Israel. The long-standing First Israel Fund (ISL) has the drawback of its closed-end fund structure and a 1.7% expense.

ISL also has a few other problems that require mention. Due to the closed-end structure, we are never quite sure what the fund is holding at a given time. It appears to overemphasize financials with a 30% weighting. And it currently trades at a large premium to net asset value.

All of these facts steer me towards the new offering, the IES. That said, this single-country fund has 25% of its entire basket in a single stock, Teva Pharma (TEVA). That's not exactly what I'd call a diversified index fund.

Teva Pharma (TEVA) is an extraordinary success story in the drug manufacturing world. What's more, its shares have more than doubled in the last 5 years. Still, there have been volatile sell-offs in its recent history. Witness the 37.5% bearish decline it experienced from 1/06 to 7/06. The shares required 18 months to recover.

Granted, the new IES is a method to diversify away from some of the single company risk. Yet 25% of the index movement will rest with the success or failure of Teva Pharma.

Personally, I'd rather seek regional exposure rather than use single-country funds with questionable diversification. For instance, while the S&P Emerging Middle East and Africa Fund (GAF) has a host of issues that I criticized in earlier commentary, the fund provides 65% South Africa and 20% Israeli exposure.

In truth, it may be better to wait for a truly diversified Middle Eastern ETF. Many expect that one will be available soon in 2008.

In the meantime, emerging market investors might wish to stick with the exceptional stand-by in Vanguard Emerging Market (VWO). It's pretty tough to beat if you're looking for a portfolio as opposed to a concentrated bet.

(Is Israel really an emerging market? That's fodder for another article altogether!)

Comments

[haydete]

Whether it is "good" or not to have TEVA such a large component, it is not atypical. EWZ is made of ~25% RIO and ~25% PBR. EWW is ~25% AMX, for example.