Amid events including military conflicts in Gaza and Ukraine, and the beheadings of three journalists by ISIS, a spate of uncertainty has crept into some ex-U.S. global equity markets, but Israeli stocks have remained surprisingly durable.
That has proven to be good news for the Market Vectors Israel ETF (NYSEArca: ISRA) and the iShares MSCI Israel Capped ETF (NYSEArca: EIS). In July, Israeli stocks, EIS and ISRA pulled back a bit after the country increased its military presence in the Gaza region, prompting an output slowdown as many as 20% of laborers skipping work from among the 500 factories within a 25-mile radius of Gaza. [Regional Uncertainty Weighs on Israel ETF]
ISRA is down 2.4% in third quarter, a performance that outpaces both the rival EIS and the iShares MSCI ACWI ETF (NasdaqGS: ACWI).
“Additionally, there are several major industrial trends and cycles that we believe can carry markets higher over the medium and long term. One example is the forthcoming refresh cycle of enterprise data centers, cloud computing, and telecommunications/networking infrastructure both in Developed and Emerging Markets which is needed to support an ever-increasing demand for data storage, connectivity, and media consumption. Other examples are the emerging energy industries in both Israel and the U.S. and the incredible advances in science, medicine and health care,” BlueStar Indexes, ISRA’s index provider, in a recent research note.
Speaking of BlueStar and the BlueStar Israel Global Index, index construction is a pivotal point in the ISRA story. ISRA has trailed its competitor EIS this year due in part to EIS’ larger weight to Teva Pharmaceuticals (NasdaqGS: TEVA), a rumored acquisition target, and a bigger allocation to the financial services sector. [Teva Takeover Could Lift These ETFs]
However, ISRA’s overall health care allocation is 29.9%, or about 650 basis points in excess of that found in EIS.
ISRA’s index tracks “Israeli companies with primary listings in U.S. or London, and Israel-linked companies. With that more liberal criteria, ISRA tracks 115 stocks, far more than the 52 tracked by EIS,” reports Eric Balchunas for Bloomberg.
As Balchunas notes, there have been occasions when ISRA’s deeper bench has stoked out-performance of EIS. For example, early adopters of ISRA have been treated to a 22% gain by the ETF since it debuted in late June 2013. EIS is up 17.2% over the same period.
Although ISRA has to contend with geopolitical volatility and the specter of recession in Europe, there are catalysts that could drive the ETF higher. As BlueStar notes, a stronger U.S. dollar should benefit Israeli health care, materials and technology names. Those sectors combine for two-thirds of ISRA’s weight.
Market Vectors Israel ETF
