This week, we are reviewing two financial products that focus on the Tel Aviv Stock Exchange (TASE): the only two overseas exchange traded funds (ETFs) that track Israeli stock indices. The older of the two is iShares MSCI Israel Capped (NYSE: EIS), which was launched in March 2008; the other is Market Vectors Israel ETF (NYSE: ISRA), which was launched just under a year ago, in June 2013.
Both ETFs are listed on the New York Stock Exchange. iShares MSCI Israel Capped manages more assets, albeit this is still a niche product for American investors: six years after its launch, the fund has $128 million under management, a small amount in US terms. Market Vectors Israel is smaller, with $44 million under management, but taking into account its limited distribution compared with the iShares brand, and its newness, this is actually a surprising figure.
These numbers explain why they are the only two ETFs at the moment that are specifically designed for investment in Israel. On the other hand, if they were more funds, the aggregate amount managed would probably be higher. The two funds charge similar management fees: Market Vectors Israel charges 0.59%, and iShares MSCI Israel Capped charges 0.62%.
The interesting thing about the two ETFs is not the fact that they invest in Israel, but the difference in the way the indices that they track are constructed, and the difference between them and the Tel Aviv 100 Index.
iShares MSCI Israel Capped tracks the MSCI Israel Capped Index. Capped means that the weight of an individual share cannot exceed a certain threshold, usually 25%. The problem is that the threshold is too high, especially in small markets, which are characterized by a limited number of large companies. As a result, Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) accounts for 24% of the ETF. For some reason iShares MSCI Israel Capped does not include Perrigo Company (NYSE:PRGO; TASE:PRGO), but it does include other large shares.
Market Vectors Israel's threshold for an individual share is 15%, and Teva is close to it.
The Tel Aviv 100 Index weights shares, in order to mitigate the influence of big stocks, especially Teva and Perrigo.
Although the Tel Aviv 100 Index and MSCI Israel include only shares listed in Israel (some of which are dual-listed in the US), Market Vectors Israel tracks the BlueStar Israel Global Index, which has a broader definition of Israeli shares to include shares of companies that are based or founded in Israel or by Israelis, but which are not traded in Israel.
The most prominent examples are Check Point Software Technologies Ltd. (Nasdaq: CHKP) and Amdocs Ltd. (Nasdaq: DOX), which account for 7.04% and 5.14%, respectively, of Market Vectors Israel. Other companies, with smaller weights, are Stratasys Inc. (Nasdaq: SSYS), SodaStream International Ltd. (Nasdaq: SODA), Mellanox Technologies Ltd. (Nasdaq:MLNX) (which is no longer listed on the TASE), Teddy Sagi's Playtech Cyprus Ltd. (LSE:PTEC), Plus500 Ltd. (AIM: PLUS), and even a small holding in Cinema City International NV (WSE: CCI), which is traded on the Warsaw Stock Exchange. A side effect of Market Vectors Israel's different composition is lower exposure to the shekel than for iShares MSCI Israel Capped.
There are also differences in the two ETFs' exposures to sectors: Market Vectors Israel has less exposure to the financial sector than iShares MSCI Israel Capped, 18% to 32%. On the other hand, Market Vectors Israel has greater exposure to the technology than iShares MSCI Israel Capped, 30% to 6.5%.
To sum up, Market Vectors Israel has a more balanced composition than iShares MSCI Israel Capped. Although Market Vectors Israel leans toward technology, given that Israel is an exporter, of which technology constitutes an important part, the ETF probably better represents the Israeli story, despite its broader definition of an Israeli company. This also shows that while index products might be considered straighforward, the reality is very different.
The author is a partner in ISIS - Intelligent Structured Investment Solutions Ltd. and serves as a senior analyst of financial products at Pioneer International Group, and he may have an interest in the matters discussed in this article. This article should not be considered to be a recommendation to purchase or sell securities or as an alternative to a personal investment consultant.
Published by Globes [online], Israel business news - www.globes-online.com - on April 29, 2014
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