Ex-U.S. developed equity markets are struggling this year, but amid a recent rebound some developed markets, one stands out a compelling tactical opportunity: Israel.
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Since its promotion to developed market status from the emerging markets designation in 2009, Israeli stocks have become scant percentages of widely followed developed world benchmarks.
That makes single-country exchange traded funds such as the Market Vectors Israel ETF (ISRA) preferred avenues for accessing Israeli stocks. ISRA is down 3.7 percent year-to-date, but that's about 200 basis points better than the MSCI EAFE Index. The Israel ETF started to flex its muscles in recent weeks, soaring 2.2 percent over the past month while the MSCI EAFE Index is off 0.6 percent over that period.
A Closer Look
ISRA follows the BlueStar Israel Global Index, a benchmark that focuses on sectors that are drivers of the new Israeli economy: Healthcare and technology. Those sectors account for over 63 percent of ISRA's weight, giving the ETF exposure to some well-known U.S.-listed fare such as Teva Pharmaceuticals Industries Ltd (ADR) (TEVA) and Perrigo Company plc Ordinary Shares (PRGO).
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As is the case with other developed markets, monetary policy looms large in Israel and for ISRA. Recent research by BlueStar, ISRA's index provider, indicates inflation remains subdued in Israel and well below the Bank of Israel's target range of 1.5 percent to 3 percent. BoI doesn't see that level being touched until the middle of next year, according to BlueStar.
ISRA has previously been highlighted as a play on healthcare sector consolidation, speculation that in prior months, Perrigo and Teva have been parts of. However, it must be stated that's Israel's technology sector that's luring foreign buyers.
While the total dollar values are small relative to U.S. mergers and acquisitions standards, BlueStar points out that Dow components Cisco Systems, Inc. (CSCO) and Intel Corporation (INTC) recently made deals to acquire smaller Israel technology firms.
Tech Ripe For Consolidation?
The weighted average market value of ISRA's holdings is $10.8 billion, according to Market Vectors data. That number is skewed higher by the likes of Perrigo and Teva, which is to say the average market capitalization of ISRA's roster ex-Perrigo and Teva is even deeper in mid-cap territory. That could be seen as a sign that Israel's technology sector remains ripe for consolidation at the hands of cash-rich U.S. technology giants.
More than half of ISRA's top 10 holdings are either healthcare or technology names. The ETF holds 113 stocks total.
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