You can imagine if you haven’t been paying attention to the largest Israeli exchange-traded fund lately, iShares MSCI Israel ETF (NYSEARCA:EIS).

If you stopped investing in stocks based in Israel after the war in the country began in Gaza, what you may remember is the 8% drop between October 7 and early November. But by tuning in, you missed a 40% increase in the ETF price, and narrowly edged out the 32% increase in the S&P 500 Index since then.

With signs pointing to a potential ceasefire in the conflict, geopolitical headwinds could ease, allowing EIS to make further gains. While I see the ETF as a Delay At current levels, a 5%-10% pullback would create an opportunity to enter for a 12-18 month period.

After I covered the Israeli stocks and economic developments — as a journalist and blogger — over the past 20 years, I see this ETF as a great starting point to explore the undervalued and overvalued names that call this country home. Over the next few weeks, I’ll be covering many of the U.S.-traded stocks in EIS and its peers’ portfolios.

Broadest basket with Israeli colleagues

Of the four U.S.-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. Its top 10 holdings account for just over 39% of its total weighting. It is benchmarked to the MSCI Israel Capped Investable Market Index.

The EIS sector mix is ​​heavy on information technology (38.3%), which is understandable given the breakout stars of the Israeli startup community over the past decade. These range from tech security company Cyber ​​Ark Software (CYBR) to business process platform Monday.com (MNDY).

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

Click to enlarge

I am concerned about the holding companies that are connected to the local economy (see below), including the 23.1% of holdings in the second-largest sector, Financials. Also of concern is the fourth-largest sector, Real Estate, at 8.4%.

Comparison with colleagues

The three other Israel-focused funds are 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).

Peer ETF holdings (by sector, as of 2024-08-20)

Click to enlarge

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

If you’re looking for yield, the VanEck Israel ETF (ISRA) is the best option, with a TTM yield of 1.74%, compared to 1.19% for the EIS.

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

EIS has the best Momentum rating, B, of the four Israeli country funds, according to Seeking Alpha data. The momentum behind the ETF tops the S&P 500 for the three-month metric, 6.67% versus 4.86%, and the nine-month metric, 24.92% versus 23.20%.

Local economy casts shadow on 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. GDP grew at an annualized rate of 1.2% in the three months through June, compared with 1.4% in the same period a year earlier.

Business output fell 1.9%, exports of goods and services fell 8.3% and fixed investment gained 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 ongoing 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 weigh on at least three sectors of the ETF. While Consumer Discretionary shares make up just 3.28% of the fund and Consumer Staples 2.13%, some names could underperform.

However, it is mainly the investments in the financial and real estate sectors that worry me the most.

Yes, there are signs that investors are returning to the Israeli housing market, as the number of real estate transactions in the first five months of 2024 was 28% higher than in the corresponding period of 2023. However, according to data from the Ministry of Finance, 7,800 apartments were sold per month during that period; that is 15% less than the multi-year monthly average.

Considering that three of the country’s largest banks — Tel Aviv-listed Bank Hapoalim, Bank Leumi and Israel Discount Bank Ltd — are in the top five EIS holdings. Add to that one of Israel’s largest mortgage lenders, Mizrahi-Tefahot, at number 11, and you can see the source of my concern.

EIS is fairly appreciated here

So, what is our take on the iShares MSCI Israel ETF? At current levels, the numbers show it is fairly valued, but with entry opportunities once there is a 5-10% pullback. Our Hold is in line with the Seeking Alpha Quant Rating, which shows 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.

On the technical side, EIS is priced above all the simple moving averages, more pronounced against the 200-day (9.80%) and 100-day lines (6.38%). If you’re a technically minded investor looking to get back into an Israeli country fund, the ARK Israel Innovative Technology ETF (IZRL) is trading below that 100-day SMA, -0.91%.

What should investors do?

As someone who is here on the ground in Israel, the economic and political challenges are not lost on me. Yet Israeli companies continue to thrive. Startups continue to raise money at significant valuations. And investors should be ready to make a move for the broadest country ETF exposure offered here… Just not yet.