You could be forgiven if you’ve not looked lately at the biggest Israel exchange-traded fund, iShares MSCI Israel ETF (NYSEARCA:EIS).
If you tuned out from Israel-domiciled stocks following the start of the country’s war in Gaza, what you may remember is the 8% decline between Oct. 7 and the beginning of November. But in tuning out, you’ve missed a 40% run up in the ETF price, narrowly edging past the S&P 500 Index 32% rise since then.
With signs pointing to a potential ceasefire in the conflict, geopolitical headwinds could be calming down, providing room for EIS to gain even further from here. While I see the ETF as a Hold at current levels, a 5%-10% pullback would create an opportunity to jump in for a 12-18 month duration.
Having covered Israeli stocks and economic developments — as both a journalist and blogger — for the last 20 years, I see this ETF as a great starting point to explore undervalued and overvalued names that call this country home. Over the coming weeks, I will be covering many of the US-traded stocks in EIS and its peers’ portfolios.
Broadest Basket of Israel Peers
Of the four US-listed single-country ETFs focused on Israel, iShares Israel is the biggest, with a net asset value (NAV) of $65.51 and a robust basket of 113 Israeli stocks. The top 10 holdings account for just a bit more than 39% of the total weight. It is benchmarked to the MSCI Israel Capped Investable Market Index.
The EIS sector mix is heavy on Information Technology (38.3%), which is understandable, considering the breakout stars of Israel’s startup community of the last decade or so. These run the gamut from tech security firm Cyber Ark Software (CYBR) to business process platform Monday.com (MNDY).
EIS Top 10 Holdings (as 2024-08-20)
I have some concerns about the holdings tied to the local economy (see below), including the 23.1% of the holdings in the second-biggest sector, Financials. Equally concerning is the fourth-biggest sector, Real Estate, at 8.4%.
Peer Comparison
The three-other Israel focused funds include ARK Israel Innovative Technology ETF (IZRL) [NAV $19.79], VanEck Israel ETF (ISRA) [NAV $37.98], and Amplify BlueStar Israel Technology ETF (ITEQ) [NAV $47.01].
Peer ETF Holdings (by sector, as of 2024-08-20)
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EIS, at 13.39%, leads this group in one-year total return, according to Seeking Alpha data. ISRA has delivered 9.02% to investors, while ITEQ and IZRL have paid a disappointing 1.76% and 1.03%, respectively.
If you’re looking for yield, it’s the VanEck Israel ETF (ISRA) that should have your attention, with a TTM yield of 1.74% compared to EIS at 1.19%.
EIS and ISRA charge a management fee 0.59%, while both IZRL and ITEQ charge investors 0.75%.
EIS has the best Momentum grade, B, of the four Israel country funds, according to Seeking Alpha data. The momentum behind the ETF tops the S&P 500 for the three-month metric, 6.67% vs. 4.86%, and the nine-month, 24.92% vs. 23.20%.
Local Economy Casts Shadows on Biggest Holdings
Israel’s economic growth slowed significantly in the second quarter of the year, data from the country’s Central Bureau of Statistics showed on Aug. 11. Quarter-on-quarter GDP grew at an annualized 1.2% rate in the three months to June, compared with 1.4% for the year-earlier period.
Business production fell 1.9%, exports of goods and services sank 8.3%, and investment in fixed assets eked out a 1.1% gain. Annual inflation accelerated to 3.2% in July 2024, from 2.9% in June, marking the highest reading since November 2023.
Meanwhile, Fitch Ratings last week maintained a negative outlook on Israel’s credit, reflecting the financial impact of the war. “The downgrade to ‘A’ reflects the impact of the continuation of the war in Gaza, heightened geopolitical risks and military operations on multiple fronts,” Fitch said in a statement.
What does this mean for EIS? As noted above, economic conditions are likely to weigh on at least three of the ETF’s sectors. While Consumer Discretionary stocks only make up 3.28% of the fund and Consumer Staples, 2.13%, some of the names could be underperformers.
Still, it’s the holdings in the Financials and Real Estate that worry me the most.
Yes, there are signs that investors are returning to Israel’s housing market, as the number of real estate transactions in the first five months of 2024 was 28% higher than in the comparable period of 2023. However, according to Finance Ministry data, 7,800 apartments were sold per month during that period; that’s 15% fewer than the multi-year monthly average.
As three of the country’s biggest banks — Tel Aviv-traded Bank Hapoalim, Bank Leumi and Israel Discount Bank Ltd — are in the top five EIS holdings. Add one of Israel’s largest mortgage lenders, Mizrahi-Tefahot, sitting at number 11, and you can see some of what’s behind my concern.
EIS is Fairly Valued Here
So, what’s our read on the iShares MSCI Israel ETF? At current levels, the numbers show it’s fairly valued, but with entry opportunities as soon as a 5-10% pullback. Our Hold is in line with the Seeking Alpha Quant Rating, which shows as a pretty solid Hold at 3.05.
That rating has volleyed between Hold and Sell for most of August, after alternating between Hold and Buy in July.
On the technical side, EIS is priced above all simple moving averages, pronounced more so against the 200-day (9.80%) and 100-day lines (6.38%). If you’re a technically inclined investor looking to get back into an Israel country fund, the ARK Israel Innovative Technology ETF (IZRL) is trading below that 100-day SMA, -0.91%.
What Should Investors Do?
As someone on the ground here in Israel, the economic and political challenges here aren’t lost on me. Still, Israeli companies continue to thrive. Startups continue to raise money at significant valuations. And investors should be keeping their dry powder ready to make a move into the broadest country ETF exposure offered here… Just not yet.
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