EIS: Time to Review Israel’s Largest ETF? (NYSEARCA:EIS)

You could be forgiven if you haven’t looked at Israel’s largest stock exchange fund lately, the iShares MSCI Israel ETF (NYSEARCA: EIS).

If you gave up your shares domiciled in Israel after the start of the country’s war in Gaza what you remember is the 8% drop between October 7 and early November. But by quitting, you’ve missed out on a 40% gain in the ETF’s price, slightly outperforming the S&P 500’s 32% since then.

With signs pointing to a potential ceasefire in the conflict, the geopolitical winds could calm, giving room for the EIS to gain even more from here. While I see the ETF as a keep at current levels, a 5%-10% pullback would create a 12-18 month entry opportunity.

After they covered the Israeli stocks and economic developments – both as a journalist and blogger – over the past 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’ll be covering many of the US-traded stocks in EIS and its peers’ portfolios.

The widest basket of equals in Israel

Of the four US-listed single-country ETFs focused on Israel, iShares Israel is the largest, with a net asset value (NAV) of $65.51 and a robust basket of 113 Israeli stocks. The top 10 holdings account for just over 39% of the total weight. It is compared to the MSCI Israel Capped Investable Market index.

The EIS sector mix is ​​heavy on information technology (38.3%), which is understandable considering the rising stars of Israel’s startup community over the past decade or so. They run the gamut from technology security firm Cyber ​​Ark Software ( CYBR ) to business process platform Monday.com ( MNDY ).

EIS Top 10 Holdings (as 2024-08-20)

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I have some concerns about holdings related to the local economy (see below), including the 23.1% of holdings in the second largest sector, financial. Equally worrying is the fourth largest sector, Real Estate, with 8.4%.

Peer comparison

The other three 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 USD).

Peer ETF Holdings (per sector, from 2024-08-20)

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EIS, at 13.39%leads this group in total one-year returns, according to Seeking Alpha data. ISRA delivered 9.02% investors, while ITEQ and IZRL paid a disappointing amount 1.76% and 1.03%respectively.

If you’re looking for yield, the VanEck Israel ETF (ISRA) should catch your eye, with a TTM yield of 1.74% versus EIS of 1.19%.

EIS and ISRA charge a management fee of 0.59%, while both IZRL and ITEQ charge investors 0.75%.

EIS has the best Momentum grade, B, of Israel’s four country funds, according to Seeking Alpha data. Momentum behind the ETF is outperforming the S&P 500 for three months, 6.67% versus 4.86%, and nine months, 24.92% versus 23.20%.

The local economy casts shadows over the largest 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 August 11. Quarterly GDP grew at an annualized rate of 1.2% in the three months to June, compared with 1.4% for the year-ago period.

Business production decreased by 1.9%, exports of goods and services decreased by 8.3%, and investments in fixed assets increased by 1.1%. 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 continued 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 affect at least three of the ETF’s sectors. While Consumer Discretionary stocks make up just 3.28% of the fund and Consumer Staples 2.13%, some of the names could underperform.

However, it is the financial and real estate holdings that worry me the most.

Yes, there are signs that investors are returning to the real estate market in Israel, 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 data from the Ministry of Finance, 7,800 apartments were sold per month during the period; it is 15% less than the multi-year monthly average.

As three of the country’s largest banks – Bank Hapoalim, Bank Leumi and Tel Aviv-traded Israel Discount Bank Ltd – are in the top five EIS holdings. Add in one of Israel’s largest mortgage lenders, Mizrahi-Tefahot, which is number 11, and you can see what lies behind my concern.

EIS is quite appreciated here

So what do we read about the iShares MSCI Israel ETF? At current levels, the numbers show that it is quite valued, but with entry opportunities as soon as a 5-10% pullback. Our Hold is in line with the Seeking Alpha Quant Rating, which looks like a pretty solid Hold at 3.05.

That rating fluctuated between Hold and Sell for most of August, after alternating between Hold and Buy in July.

Technically, the EIS is priced above all simple moving averages, more pronounced than the 200-day (9.80%) and 100-day (6.38%) lines. If you’re a technically inclined investor looking to get back into an Israel country fund, 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 are not lost on me. However, Israeli companies continue to thrive. Startups continue to raise money at significant valuations. And investors should keep their dry powder ready to make a move to the broadest country ETF exposure offered here… Just not yet.