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.

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