Summary
- iShares MSCI Israel ETF - EIS - tracks a cap-weighted index of firms based in Israel, though most of its holdings are US-traded stocks.
- Israel is the home to some of the most innovative technology companies in the world, as well as many non-US offices of leading US tech firms.
- In this, my initial report on EIS, I rate it a Hold. That has more to do with deteriorating technology sector conditions than any innate issues with this ETF.
By Rob Isbitts,
Many investors may be surprised to learn that 107 stocks of Israeli companies trade on US exchanges, totaling more than $170B in market capitalization. Most of those are on the Nasdaq, which makes sense since so many of them are in the tech and biotech industries. Israel certainly has its share of geopolitical risk. But one aspect of its position within the Middle East has spawned some of the world's greatest technological innovations. Some of this is rooted in Israel's decades-long focus on defending itself, which has launched a long list of cybersecurity, software, semiconductor and other businesses. EIS captures the potential growth of those businesses.
Israel's decades-long focus in higher education and innovation have produced a vibrant economy that is a substantial player on the global stage, given the country's small size, both geographically and in terms of population. As this chart shows, other than during the pandemic in 2020, Israel's GDP has not been negative in the recorded history of that data. In other words, there have been no sharp recessions.
There's a lot to like about EIS. But there's plenty to not like about the state of the global equity market. Net-net, I land at a Hold rating for EIS in this, my first report on this single-country ETF.
Real GDP (Seeking Alpha and Ycharts)
Strategy
EIS aims to track the MSCI Israel IMI Capped NR USD index, which is based on the MSCI Israel index. The former version of the latter index simply adds a limit on how large an individual position can be. 25% is the "cap" on any single stock in the index.
Proprietary ETF Grades
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Offense/Defense: Offense
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Segment: Non-U.S. Equity
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Sub-Segment: Country
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Proprietary Technical Ratings
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Short-Term (next 3 months): D
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Long-Term (next 12 months): D
Rating scale: A = Excellent, B = Good, C = Fair, D = Weak, F = Poor
For a detailed description of MII's proprietary technical rating system, see disclosures at bottom of this report.
Holding Analysis
EIS is a single country play, holding 100% of its assets in Israeli companies. On a sector basis, the fund leans heavily towards Technology (32%) and Financials (26%) with Real Estate and Healthcare at around 9% each.
As with many single-country ETFs, EIS is top heavy, and that is supplemented by many smaller company positions. The fund owns over 120 stocks, but the top 25 account for 72% of assets.
Strengths
This is a small cap ETF, with an average market capitalization of under $5B. I view that as a positive, since I'm assuming that no investor would treat EIS as a core holding. Thus, the growth focus and smaller-company nature of this ETF suits the role EIS is likely to play for investors: it is an alternative to having a US-dominated small cap growth portion of a portfolio.
EIS was the first Israel-focused ETF on the market, making its debut back in 2008. It is the largest (by AUM) of the 4 ETFs that are dedicated to tracking Israeli stocks.
In addition, Israel's agriculture sector has blossomed in the desert due to advanced technological innovations, particularly in the area of irrigation. Furthermore, the country's pharmaceutical sector, including global leader TEVA ( TEVA ) helped develop some of the first COVID vaccines.
Weaknesses
Israel has its share of issues, and while those may not directly impact the corporate sector, there is always that potential. Since 2019, there have been 5 legislative elections. The country is in the process of making some significant political changes which may bring new challenges for businesses operating there.
EIS is not a huge ETF, with AUM at around $140mm. It trades with a modest level of volume, around $1.7mm per day. Even though most holdings are US-traded equity issues of Israeli companies, the smaller capitalization size of many of those holdings could crimp liquidity at times.
Opportunities
EIS's mix of bank and tech companies means that it has a foot in both the growth and value camps within the equity market. There are other, more growth-oriented ETFs that cover Israel, but EIS is a balanced offering. And, while many of EIS's biggest holdings are global companies, the domestic economy makeup offers an oasis of sorts for investors, should the US and other major world economies continue toward what appears to be a recessionary period.
This ETF is trading at roughly 30% below its all-time high price, which in itself is a valuation positive at a time when major US averages like the S&P 500 are much closer to their own all-time highs.
Threats
Political tension is running high in Israel, and it poses a threat to the sustained economic growth of the country. This, and the negative sentiment toward the Israeli market that can result from periods of heightened geopolitical threats, are ever-present concerns that investors in EIS must accept.
Conclusions
ETF Quality Opinion
EIS has a fairly straightforward single country model. It invests in Israeli companies while trying not to overweight any one stock. Given the innovative potential of this economy and the many outstanding companies held here, I will be keeping EIS on my watch list.
ETF Investment Opinion
I rate EIS a Hold for now, which is the highest rating I can muster for any long equity ETF in the current environment. I can see the potential for EIS to trade down into the $40s if the global stock market weakens further. If the stock market were to sell off severely this year, I'd likely put this ETF way up on my "look to buy for long-term" watchlist. But not at this time.
Modern Income Investor's proprietary technical rating system was created by the firm's founder, Rob Isbitts, a chartist for more than 40 years. The ratings emphasize risk-management, and the belief that while any investment can appreciate in price at any time, each investment carries a different level of potential for major loss. The balance of reward and risk is calculated each night for thousands of securities, using a formula that analyzes price trend, strength of that trend and key price levels. It analyzes data over multiple time frames to produce a short-term rating (looking 3 months out) and a long-term rating (looking 12 months out).
For further details see:
EIS: Recession-Resistant Economy, Many Outstanding Holdings Make This ETF One To Follow