Israel-Focused ETFs’ Outflows Jump Amid Rising Tensions

Israel-focused ETFs experienced more than $47 million in outflows this year as the Israeli government’s efforts to limit the powers of the country’s supreme court provoked major protests and made investors skittish. 

In early January, Israeli Justice Minister Yariv Levin announced a broad set of judicial reforms that would severely limit the power of the supreme court.  

This caused enormous protests across the country that intensified when the first law putting these changes into place was passed on Monday. This prompted an intensified wave of protests, a strike by the nation’s doctors, and set up a potential constitutional crisis as the court will hear a case challenging the law. 

There are four ETFs that specifically invest in Israel, with $388 million in assets among them. The largest is the iShares MSCI Israel ETF (EIS), an index fund with $124 million in assets. The rest are the VanEck Israel ETF (ISRA), another index fund; the BlueStar Israel Technology ETF (ITEQ), a tech-sector index fund; and the ARK Israel Innovative Technology ETF (IZRL), which tracks the ARK Israeli Innovation Index.  

The ETFs all fell on the news of the law’s passage. EIS, the largest, was down 4% in the past week. It had initially fallen nearly 5% in intraday trading before recovering some Tuesday. All four ETFs are up year to date, but vary substantially from EIS’s 0.3% rise to IZRL’s 8.8%.  

This performance compared poorly to global markets and the tech sector globally. The iShares MSCI EAFE ETF (EFA) has risen 12.5% this year and the global tech sector, measured by the iShares Global Tech ETF (IXN), has risen nearly 40%. That illustrates that the Israeli market and tech sector are clearly experiencing significant headwinds. 

In the second half of last year, the funds’ flows were mixed, with ITEQ and EIS seeing inflows, and ISRA and IZRL seeing outflows. Net flows for all four produced inflows of $4.3 million.  

Reforms Causing ‘Uncertainty’ in Israel Economy 

Amir Yaron, governor of the Israeli Central Bank, said the reforms caused “an increase in the level of uncertainty in Israel’s economy,” and that “continued uncertainty is liable to have notable economic costs.” 

Morgan Stanley downgraded its view of Israel’s sovereign credit to a “dislike stance.” Credit rating agency Moody’s Investor Service issued a report saying, “There is a significant risk that political and social tensions over the issue will continue, with negative consequences for Israel’s economy and security situation.” In April, Moody’s had downgraded its outlook on Israel’s credit rating from “positive” to “stable.” 

Steven Schoenfeld, CEO of Market Vector Indexes, which maintains the indexes for ISRA and ITEQ had a less pessimistic view. He emphasized that many of the largest Israeli companies address global markets rather than domestic ones.  

“The fundamentals of the Israeli economy will show through, and any weakness is a buying opportunity in the medium term,” Schoenfeld explained. 

Note: Corrects fourth paragraph to say that the Ark Israel Innovative Technology ETF tracks the Ark Israeli Innovation Index. It's not an active fund, as earlier reported.