The New Market Vectors Israel ETF (ISRA) In Focus

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July 5, 2013 10:40am NYSE:EIS NYSE:ISRA

market vectorsMarket Vectors, the ETF arm of Van Eck Global, is well known for its wide variety of country products which are often the only ways that U.S. investors can easily tap into certain markets.

This is the case in countries like Egypt (EGPT) and Vietnam (VNM), where investors only have Market Vectors ETFs to play on. Moreover, the company has also spread to other nations such as Colombia (COLX), Russia (RSX), Indonesia (IDX) and Poland (PLND).

This time, the company has expanded its line-up to the Middle Eastern countries, with the recent launch of Market Vectors Israel ETF (NYSEARCA:ISRA) targeting the Israeli market. This marks the Market Vector’s second entry into this region and brings the total number of products to 57.

Israel ETF in Focus

The new ETF looks to track the BlueStar Israel Global Index to capture the performance of the large and most liquid companies as well as mid and small cap Israeli companies that have sufficient liquidity. The index doesn’t just include firms based in Israel, as it also considers tax status, location of revenues and employees, among other factors, in determining ‘Israeli companies’.

The product has roughly 89 securities in its portfolio with heavy concentration in its top 10 holdings. The top firm Teva Pharmaceutical (TEVA) alone makes up for nearly 13% share while Perrigo (PRGO) and Check Point Software Technologies (CHKP) round off the next two spots with a combined 16% share.

From a sector perspective, information technology occupies the top position with about one-third of assets while health care and financial also take up double-digit allocation in the fund’s portfolio. The ETF will charge investors 59 basis points a year in fees for this exposure.

Further, the ETF has a nice mix of all caps with 41.42% going to large caps, 37.31% going to mid caps and the rest to small caps. Though the fund provides exposure to the Israeli market, U.S. firms account for nearly 26% share and United Kingdom makes up the smallest portion.

How does it fit in a portfolio?

This ETF offers solid exposure to an often overlooked developed market. Israel often moves somewhat independently of other industrialized countries, so it could be an interesting play from a diversification perspective.

The country has proven quite resilient and has shown consistent GDP growth in the past. The nation is also a prime play for those seeking technological prowess and medical expertise (read: Israel ETF Continuing Run Despite Risks).

Obviously, there are some serious geopolitical issues related to territorial disputes, endless animosity and security concerns present in Israel. Tension is forever high because of dispute with the Palestinian Authority and conflicts in its neighboring countries – Lebanon, Syria and Iran. This might hurt the economy and result in increased volatility. So these factors definitely need to be considered as well.

Can it succeed?

The biggest competitor in the space is the iShares MSCI Israel Capped ETF (NYSERCA:EIS). This fund holds a basket of Israeli securities, charging investors 60 basis points a year in fees for this service.

The fund, however, hasn’t exactly seen substantial investor interest as the ETF has been able to attract just $76 million in its asset base since its inception in Mar 2008. This indicates that investors haven’t really embraced Israeli ETF investing and that a second fund in the space might find it difficult to succeed (read: Israel ETF Investing 101).

Still, ISRA could make a name for itself thanks to its capped strategy and index methodology. No single stock in the ETF makes up more than 13% of assets, suggesting some diversification from a security perspective when compared to EIS, which has over one-fifth of its assets in TEVA alone.

Further, the new product includes Israeli companies that are listed outside the country, a feature that its counterpart avoids.

So while ISRA might have a tough fight given the political issues, it could be able to see decent inflows and good investor interest due to diversification benefits and an exposure profile that is different from EIS.

This article is brought to you courtesy of Eric Dutram.

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