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:
U.S. investors have tried for the past few years to access the growth in the Israeli market without a true index vehicle for doing so. The Amidex35 is probably the most accurate vehicle for those looking to get exposure to Israel as a whole. It’s an interesting index, splitting total market cap between Tel Aviv and the U.S (around 60/40). So, you get local Israel exposure with some growth-y tech companies layered in. Kudos
to Amidex’s Cliff Goldstein who shared some time with us on CNBC recently talking about Israeli companies and the market opportunity as a whole. We interviewed Cliff a couple of months ago and it’s worth reading that interview again here. (Continue »)
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.
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