Israel ETFs Sinking As Conflict Wages On

August 19, 2014

The Gaza conflict is taking its toll on the Israeli economy.

Israel ETFs vs VWO

Chart courtesy of StockCharts.com

The ongoing conflict in Israel and Gaza is finally taking its toll on the Israeli economy. According to Bloomberg, Israel's GDP grew at 1.7 percent in the second quarter—far less than the 2.7 percent economists were expecting.

Worse yet, exports declined nearly 18 percent over the quarter. That's particularly troubling for a country where exports account for more than 34 percent of economic activity.

Still, some are expecting the central bank to intervene to cut interest rates and weaken the shekel—a move that makes Israeli exports cheaper and more competitive on the global market. If that happens and the shekel weakens, it could prompt a turnaround for the sagging Israeli economy.

Those considering investing broadly in Israeli equities might consider one of two ETFs:

The iShares MSCI Israel Capped ETF (EIS | C-47) offers "pure" exposure to Israeli equities, as 100 percent of its portfolio securities are traded in Tel Aviv. Like the Israeli market, EIS is highly concentrated in its largest holdings, with more than 70 percent allocated to its top 10. It comes with heavy allocations to financials and health care—Teva Pharmaceuticals alone comprises more than 25 percent of the portfolio.

The Market Vectors Israel ETF (ISRA | C-32) offers a portfolio with a more relaxed definition of "Israeli" companies. In all, nearly a third of the portfolio is allocated to companies that don't meet the technical definition of "Israeli" but have been deemed so by an advisory committee. Compared with EIS, ISRA is less concentrated in its top holdings and holds more than twice as many securities.

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