New Israel ETF Focuses on Technology

NEW YORK (TheStreet) -- In 2008 iShares launched the MSCI Israel Capped ETF (EIS).

Since its launch, the fund has had a much more volatile ride to a similar long-term result as the iShares MSCI EAFE ETF ( EFA).

The promise of Israel revolves around a high-tech economy leading to steady GDP growth, estimated at 3.9% for 2013 and 3.4% for 2014.

EIS is not constructed to capture the benefit that might accrue to Israel from the tech sector, because it has only a 10% weighting in tech. This opens the door for the new Market Vectors Israel ETF ( ISRA), which allocates 31% to technology.

The reason that ISRA can have so much more in tech is that it employs a different selection criteria. It includes companies domiciled in Israel that have their primary stock listing in another country.

ISRA allocates a combined 21% to U.S.-listed, Israel-based Perrigo ( PRGO), Check Point Software ( CHKP) and Amdocs ( DOX), none of which are holdings in EIS. ISRA allocates a total of 25% to U.S.-listed companies and 72% to Israel-listed companies.

The other big point of differentiation between the two Israel funds is their treatment of Teva Pharmaceuticals ( TEVA). TEVA has the largest market cap of any Israeli company by a wide margin.

EIS caps the exposure to any one stock at 25%, and TEVA is currently weighted at 24% of the fund. ISRA imposes a 12.5% limit, which is where TEVA is currently weighted.

Health care is the second largest sector in the fund at 27%, followed by financials at 17%. The other sectors all have much smaller weights.

For the last few years, PRGO, CHKP and DOX have all done well while TEVA has languished. There is limited back test data available for ISRA, but for the trailing 12 months Bloomberg reports that ISRA's underlying index is up 17% vs. a gain of 15% for EIS.

ISRA will charge a 0.59% expense ratio, which is very close to the 0.60% charged by EIS. The large weighting in technology will likely result in ISRA having a negligible yield compared to EIS' 2.40% trailing yield.

Going forward, any performance dispersion between the two funds will boil down to TEVA. The case for TEVA is simple. It is a global powerhouse in the generic drug field. The population in many developed countries is aging. That obviously creates the need for more medicine, and the company's revenue and profit growth have reflected this increased demand in recent years, but the share price has not.

Barring any major overhaul of the company, the case for TEVA will be the same going forward. Any investor interested in owning Israel through an ETF will need to draw a conclusion about TEVA and then choose the appropriate fund.

At the time of publication, clients of Nusbaum's company held shares of TEVA.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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