June was a tough month for the market in general and Israel stocks were hit with a double whammy: tech stocks proved they were no longer immune to the weakening economy and the shekel continued its march higher versus the dollar.
Both EIS, the iShares MSCI Israel Capped Investable Market Index Fund, and the TAV, the NETS TA-25 Index Fund, were down about 3-4% with the overall Nasdaq down about 8%.
If you look closer at the chart, you’ll see that the TAV just recently outperformed the EIS. TEVA Pharmaceuticals (TEVA) was recently hit hard off of news of more imminent generic competition to Teva’s Copaxone (tables turned, eh?) in spite of some incrementally positive news on progress on a drug to treat Parkinsons.
We’ve written about the EIS’s extreme exposure to the generic pharma giant (weighing in at almost 25% of EIS) and this in turn, makes iShares’ Israel ETF more susceptible to fluctuations in TEVA’s stock price and ultimately, not as good a proxy for the entire Israeli market (of which TEVA constitutes less than 10% of market cap and which the TAV attempts to mimic).
Some additional reading:
The entire interview with Dave Fry of ETF Digest part of our new subscription newsletter, Israel Opportunity Investor. You can find out more about the product and the opportunities we cover at www.israelnewsletter.com.
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How did you become a leading analyst on ETFs?
Dave Fry, Founder of ETF Digest: I think being early in coverage of these fast growing investment vehicles is the easy answer. Beyond that we have tried to be more honest and blunt in our coverage of new products. We haven’t been “yes men” or suck ups for issuers and sponsors for example. Where we’ve been critical some ETF sponsors won’t talk to us any more for example which isn’t a bother since we don’t use their products anyway. Further where there are problems we’ve been out front in pointing these out. That occurred with shorting problems for retail investors where the promised benefit didn’t meet reality. (Continue »)
Aaron Katsman
IsraelNewsletter.com
Morgan Stanley (MS) just announced changes made to their MSCI Israel index. Among the changes was lowering weightings in hi-tech and insurance. Ok, nothing very unusual. They raised the index weighting on the banking sector. Again, nothing to write home about. It’s only when you look at the individual stock weightings that you may want to scratch your head. Teva Pharmaceuticals (TEVA) has a staggering 44.8% index weighting. My question to the folks at MSCI is, what’s the point? Why bother having an index which is essentially one company? After all Teva is about 9.5% of the local Tel-Aviv index.
For ETF investors this rebalance is important. Investors who have either purchased or are thinking about purchasing the iShares MSCI Israel index (EIS) had better be warned. They are in essence just buying Teva. They are certainly not getting any meaningful type of linkage to the local Israeli index. For investors looking for more diversified exposure, you may want to check out the new NETS TA 25 index fund (TAV) . In fact, fellow IOI colleague Zack “Billy Squier was underrated” Miller, had a real must-read, in-depth analysis of the differences in the 2 ETFs.
MSCI is often criticized for the same reason. They take the largest position in a particular index, and make it a very large chunk of the index they are trying to create. What’s the point? Shouldn’t a market index be a bit broader?
6/10/2008: An update on this post can be found here.
Disclosure: Author’s fund has a position in TEVA. He has no position in any other stock mentioned as of 6/6/08.
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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.
After numerous rumors of its emergence and a waiting period that rivaled Godot, finally an pure Israel ETF emerged from the big players. iShares launched the iShares MSCI Israel Capped Investable Market Index Fund (EIS). Get the prospects here and the fund fact sheet here. The iShares page on the ESI is here.
I wrote recently 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. So, not a great way to play:
1) Israel as an investment destination (and there are plenty of reasons to want to do that, see this and this.)
2) 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.
Something new
So, we’ve been waiting anxiously to see a ‘real’ Israeli ETF and it appears that the iShares MSCI Israel Capped Investable Market Index Fund (EIS) 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 be waiting for an iShares-like product for some more trading liquidity.
Couple things here:
1) This ETF invests in local, Israeli shares. Not ADRs. This is typically a good thing as some of the interesting things going on in the Israel thesis are taking place on the ground in Israel.
So you have exposure to the Israeli shekel which as we’ve spoken about a lot previously, 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 benefit greatly from the currency exposure in a strengthening shekel environment and take a hit if (when?) the shekel begins to weaken, 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. Meaning, say the Israel market (specifically, these 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.
2) Whoa! 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.
3) 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. It’s a lot of concentration in just a few names and overweights health care and financial and underweights tech and telecom.
Given this concentration, you have the following exposure to Israeli industries:
a) Health Care 25%
b) Financial 22%
c) Materials 16%
d) IT 12%
e) Industrials 10%
f) Telecom 7%
g) Consumer discretionary 3.6%
h) Energy 2%
i) Consumer staples 2%
I’m not saying this positively or negatively either 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 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. It’s just not my personal thesis.
Disclosure: 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.
Please see our Disclaimer HERE.
NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter. Stay ahead of the game and make smart decisions in Israel stocks. Go here to learn more.
