Israel ETFs Could Emerge Stronger Following Near-Term Shocks

Israeli stocks and the related exchange traded funds, including the ARK Israel Innovative Technology ETF (IZRL), are under duress this year as Prime Minister Benjamin Netanyahu attempts to initiate changes to the country’s judicial system that are widely unpopular among citizens.

IZRL, which follows the ARK Israeli Innovation Index, is lower by 2.22% year-to-date. All things considered, that’s not a dreadful performance, and it’s 240 basis points better than that of the MSCI Israel Index. Still, some global investors are pensive about Israeli stocks, particularly after Moody’s Investor Service downgraded its outlook on the country’s credit profile to “stable” from “positive” last Friday.

The ratings agency reiterated an “A1” grade on Israeli sovereign debt while acknowledging that the tech/venture-heavy economy remains sturdy — a potential positive for assets such as IZRL.

“The change of outlook to stable from positive reflects a deterioration of Israel’s governance, as illustrated by the recent events around the government’s proposal for overhauling the country’s judiciary,” noted Moody’s.

Undoubtedly, there are currently more moving parts to the Israeli investment thesis than global investors would prefer or have come to expect from a normally steady, high-growth developed market. Conversely, political volatility isn’t the norm in this country. That could be a sign that when the judicial reform controversy abates, opportunity potentially awaits with IZRL.

Another potential positive for the ARK ETF is that Israeli policymakers remain optimistic on their economy. While those comments should be taken with a grain of salt, they shouldn’t be ignored wholesale, either.

“The analysts at the Moody’s ratings agency correctly recognize the strength of the Israeli economy in all indexes and the correct and responsible economic leadership that we lead, with the wise management of public spending and in the advancement of growth-encouraging reforms,” according to a statement issued by Netanyahu and Finance Minister Bezalel Smotrich.

The duo added that it’s logical for Moody’s to assume that the judicial reform situation is having a more dire impact than meets the eye because the ratings agency does “not know the strength of Israeli society.”

If those remarks amount to more than political platitudes, IZRL could be a compelling option for investors looking to revisit Israeli. That scenario could be amplified as some market observers see value in smaller global equities. IZRL’s 76 holdings have a weighted average market capitalization of $3 billion, according to issuer data.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.